Lindas Inc. v. USA.

• Citation: 238 F.3d 1076
• Decision Date: 05 February 2001
• Docket Number: No. 99-55692,99-55692
• Parties: (9th Cir. 2001) LIDAS, INC., a Delaware corporation; DAVID CHELALA; LILIANE CHELALA, Plaintiffs-Appellants, v. UNITED STATES OF AMERICA, Defendant-Appellee
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

Page 1076

238 F.3d 1076 (9th Cir. 2001)

LIDAS, INC., a Delaware corporation; DAVID CHELALA; LILIANE CHELALA, Plaintiffs-Appellants, v. UNITED STATES OF AMERICA, Defendant-Appellee.

No. 99-55692

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted October 4, 2000

Filed February 5, 2001

[Copyrighted Material Omitted] Edward O. C. Ord, Ord & Norman, San Francisco, California, for the appellants.

Robert E. Lindsay, Tax Division, U.S. Department of Justice, Washington, D.C., for the Appellee.

Appeal from the United States District Court for the Central District of California Dickran M. Tevrizian, District Judge, Presiding. D.C. No.CV-98-04503-DT-RCX

Before: Diarmuid F. O'Scannlain, Ferdinand F. Fernandez and Johnnie B. Rawlinson, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

We must decide whether an Internal Revenue Service summons issued at the request of French tax authorities under the terms of the United States-France Income Tax Treaty may be enforced in federal court.

I

Appellants Lidas, Inc. ("Lidas") and David and Liliane Chelala (the "Chelalas") appeal the district court's dismissal on summary judgment of their complaint to quash, and its order summarily enforcing, an Internal Revenue Service ("IRS") summons issued at the request of French tax authorities pursuant to Article 27 of the Convention for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and Capital, Aug. 31, 1994, U.S.-Fr., S. Treaty Doc. No. 103-32 (the "Treaty"). Article 27 provides for the exchange of information between the tax authorities of the two nations. The Chelalas are citizens of France who permanently reside in the Congo and are the sole ultimate shareholders of Lidas.

On May 14, 1998, the IRS served a summons on Mitsui Manufacturers Bank for bank records relating to a French tax investigation of the Chelalas. On the same day, the IRS served notice of the summons on the Chelalas by sending them a copy by registered mail to an address in Nice, France provided to the IRS by French authorities. The IRS also sent the Chelalas a copy of the summons to an address in Lebanon that Thomas J. Rossitto, a long-time tax representative for Lidas, provided to the IRS on a Form 2848 (Power of Attorney) signed by the Chelalas themselves. In addition, the IRS sent copies of the summons to Lidas in Los Angeles and to Rossitto himself. Although the IRS was apparently notified a number of times that the Congo was the Chelalas'"tax home," it was not provided a specific Congo address for the Chelalas until June 15, 1998, the day the Bank was to appear before the IRS. As a result, the IRS never mailed a copy of the summons to the Chelalas' Congo address.

On June 3, 1998, the Chelalas filed a complaint under 26 U.S.C. 7609(b)(2) to quash the summons, arguing, inter alia, that the Treaty was constitutionally void; that issuance of the summons violated various provisions of the Internal Revenue Code; that summary enforcement of the summons was improper; and that they did not receive notice of the summons in the manner required by 26 U.S.C. 7609, the due process clause of the Fifth Amendment, or the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters, Nov. 15, 1965, 20 U.S.T. 361, 658 U.N.T.S. 163 ("Hague Service Convention"). The United States moved to dismiss the complaint and to enforce the summons. On February 8, 1999, the District Court granted the United States summary judgment but stayed enforcement of the summons pending this appeal.

II

The United States France Income Tax treaty was signed by the President in 1994 and ratified by the Senate in 1995 pursuant to the treaty clause, art. II, 2, cl. 2 of the Constitution. As its formal title illustrates, the Treaty's objectives are two-fold: the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital. Articles 1-26 and 29-34 of the Treaty relate to the first purpose, avoidance of double taxation, and contain provisions reducing or eliminating the tax liabilities of certain individuals who are domiciled in one of the contracting nations and who derive income from activities in the other. Articles 27 and 28 relate to the second purpose, the prevention of tax evasion, and provide for the exchange of information between the tax authorities of the two nations. The IRS summons in dispute here was issued pursuant to article 27.

According to the Chelalas, because the Treaty contains provisions purporting to alter the Internal Revenue Code-namely, those relating to the avoidance of double taxation-the Treaty as a whole infringes on Congress's power to law and collect taxes under art. I, 8, cl. 1 of the Constitution as well as the House's exclusive power to originate all bills for raising revenue under the origination clause of the Constitution, art. I, 7, cl. 1. As a result, the Treaty exceeds the lawful scope of the treaty power and requires the legislative approval of both houses of Congress before taking effect. In the absence of such implementing legislation, contend the Chelalas, the Treaty is merely executory. They conclude that the summons must be quashed because it was issued pursuant to a treaty which is of no legal effect at the present time.

A

We must first decide whether the Chelalas have standing to raise this challenge. To satisfy the standing requirement of Art. III of the Constitution, the Chelalas must establish that they suffered (1) an "injury in fact" to a legally protected interest that is (2) "fairly traceable to the challenged action of the defendant" and is (3) likely to be redressed by a favorable decision from the court. Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992).

The Chelalas meet the first two standing requirements. They have suffered an injury in fact--the IRS has summoned their bank records--and this injury is traceable to the Treaty whose constitutional validity they are challenging. However, the Chelalas' challenge to the Treaty founders on the redressability prong of the standing analysis. Even if we were to hold that the Treaty's double taxation provisions are non-selfexecuting because they infringe on Congress's exclusive powers, the Chelalas' injury would still not be redressed. As we explain below, the Treaty's exchange of information provisions, the sole cause of the Chelalas' injury, are severable from the double taxation provisions and are otherwise well within the scope of the treaty power. Hence, they are selfexecuting and can be validly applied against the Chelalas now, even if other provisions in the Treaty could not.

B

The traditional test for severability in statutory cases has been stated as follows: "[u]nless it is evident that the Legislature would not have enacted those provisions which are within its power, independently of that which is not, the invalid part may be dropped if what is left is fully operative as law." Bd. of Natural Res. v. Brown, 992 F.2d 937, 948 (9th Cir. 1993) (quoting Alaska Airlines v. Brock, 480 U.S. 678, 684 (1987)). Such an inquiry, the Supreme Court has explained, "is essentially an inquiry into legislative intent." Minnesota v. Mille Lacs Band of Chippewa Indians, 119 S. Ct. 1187, 1198 (1999) (assuming, without deciding, that the severability test for statutes applies to executive orders as well). We are not aware of any federal court that has considered how this test applies to treaties. Given the nature of the Chelalas' challenge to the Treaty, however, we need not explore here the nuances involved in translating the traditional severability analysis to the treaty context.

The Chelalas do not, and in fact could not, insist that the double taxation provisions of the Treaty are per se unconstitutional. They merely contend that such provisions require implementing legislation because they invade an exclusive power of Congress and that their inclusion in the Treaty renders the entire Treaty non-self-executing. The nature of the Chelalas' constitutional challenge shapes our severability analysis. We must decide whether the Treaty partners would have intended for articles 27 and 28 of the Treaty to be "fullyoperative" as self-executing provisions even if the remainder of the Treaty was non-self-executing and required implementing legislation before taking effect.

We have no difficulty in answering this question affirmatively. To begin with, it is far from uncommon for a treaty to contain both self-executing and non-self-executing provisions. See Restatement (Third) Foreign Relations Law of the United States 111 cmt. h (1986) ("Some provisions of an international agreement may be self-executing and others non-selfexecuting."); see also United States v. Postal, 589 F.2d 862, 884 n.35 (5th Cir. 1979) ("A treaty need not be wholly selfexecutory or wholly executory."); United States v. Noriega, 808 F. Supp. 791, 797 n.8 (S.D. Fla. 1992) (holding that some provisions of the Geneva Convention Relative to the Treatment of Prisoners of War are self-executing while others are not). Nothing in the Treaty indicates that the parties drafted it as they did with an eye to the precise contours of the subsequent political process which would be required for its various provisions to take effect. Furthermore, the exchange of information provisions are entirely independent of the double taxation provisions and, in fact were included in the Treaty to respond to an entirely separate concern, the prevention of tax evasion.

C

The Chelalas have not argued that the Treaty's exchange of information provisions, standing alone, would encroach upon exclusive Congressional power or otherwise exceed the scope of the treaty power. Such an argument would surely fail in any event, since nothing in the Constitution grants Congress the exclusive power to authorize the exchange of lawfully collected financial information with foreign states. Thus, even if the...