Shannahan v. I.R.S.

Decision Date27 April 2009
Docket NumberNo. C08-452JLR.,C08-452JLR.
PartiesWilliam P. SHANNAHAN, Plaintiff, v. INTERNAL REVENUE SERVICE, Defendant.
CourtU.S. District Court — Western District of Washington

David John Lenci, Michael K. Ryan, Samuel R. Castic, K & L Gates LLP, Seattle, WA, for Plaintiff.

Nicole Maria Elliott, Carmen M. Banerjee, U.S. Department of Justice, Washington, DC, Robert Patrick Brouillard, U.S. Attorney's Office, Seattle, WA, for Defendant.

ORDER

JAMES L. ROBART, District Judge.

This matter comes before the court on Defendant Internal Revenue Service's ("IRS") motion for summary judgment (Dkt.# 32). Having reviewed the papers submitted by the parties and heard the argument of counsel, for the reasons that follow, the court directs the clerk to renote the motion for summary judgment for July 17, 2009, and directs the parties to proceed as described herein.

I. BACKGROUND

This is a dispute under the Freedom of Information Act ("FOIA"), 5 U.S.C. § 552. It arises against the backdrop of civil enforcement and criminal proceedings against Steven N.S. Cheung and Linda Su, a.k.a. Linda Cheung ("the Cheungs"), in connection with their alleged failure to report taxable income generated by West Coast International Limited ("WCI") and West Coast International (Parking) Limited ("WCIP") (collectively, "the Entities").

A. Criminal Prosecution

The United States Attorney's Office ("USAO") for the Western District of Washington initiated a criminal investigation of the Cheungs in the 1990s. (Declaration of Janet Freeman ("Freeman Decl.") (Dkt.# 32-6) ¶ 4.) In November 1998, the USAO requested assistance from the IRS in the criminal investigation. (Declaration of Caesar White ("White Decl.") (Dkt.# 32-4) ¶ 3.) On January 28, 2003, a grand jury returned an indictment against the Cheungs. (Freeman Decl. ¶ 7.) The Cheungs failed to appear for their initial appearance and arraignment, and the court issued warrants for their arrest. (Id. ¶¶ 10, 12-13.) The criminal charges remain pending in United States v. Cheung, Case No. CR03-037RSL (W.D.Wash.). (Id. ¶¶ 8, 12.) The USAO believes the Cheungs presently reside in the People's Republic of China. (Id. ¶¶ 11, 14.) The IRS continues to assist the USAO in investigating the Cheungs, "although the process has been somewhat stalled because of the Cheungs' failure to appear for their arraignment." (White Decl. ¶ 8.)

B. Civil Examination

The IRS commenced a civil examination of the Cheungs prior to the conclusion of the criminal proceedings. (White Decl. ¶ 10.) The IRS explains that while it ordinarily will not commence a civil examination until after the completion of criminal proceedings, it did so with respect to the Cheungs because the criminal prosecution had been stalled by the Cheungs's failure to appear. (Id.) On July 27, 2007, the IRS sent 4549-A Income Tax Discrepancy Adjustment Forms, commonly referred to as Revenue Agent Reports ("RAR"), to the Cheungs, reflecting the IRS's determination that the Cheungs owed additional taxes, as well as penalties and interest, of close to $17 million. RARs include facts and conclusions that are typically drawn from documents in the possession of the IRS. On behalf of the Cheungs, Plaintiff William P. Shannahan, counsel for both the Cheungs and the Entities, protested the RARs and requested the factual and investigative documents cited and relied upon in the issuance of the RARs. The IRS denied Mr. Shannahan's request.

C. Original Documents

In January 2003, the Entities provided original business documents ("Original Documents") to IRS Agent Molly Mahoney. (Declaration of William P. Shannahan ("Shannahan Decl.") (Dkt.# 37) ¶ 4.) The documents include "original copies of account and transaction documents for WCI for the years 1993-1996, business documents for WCI for the years 1997-1999 business ledgers for [WCIP] for the years 1992-1993, and account activity detail reports for [WCIP] for 1995-1998. . . ." (Id.) The Entities did not make copies of the Original Documents. (Id.) The Entities allege that they need the documents in order to operate their businesses and in the event of an audit. (Id. ¶ 6.) The Entities requested the return of the Original Documents, and the IRS denied the request. (Declaration of David J. Lenci ("Lenci Decl.") (Dkt.# 38) ¶ 8.)

D. FOIA Requests

On October 16, 2007, Mr. Shannahan filed two FOIA requests with the IRS. (Declaration of Meghan Mahaney ("Mahaney Decl.") (Dkt.# 32-3) ¶ 4.) Mr. Shannahan filed the first request ("the Entity Request") on behalf of the Entities. (Shannahan Decl. at 10-12.) He filed the second request ("the Cheung Request") on behalf of the Cheungs. The Entity Request seeks six categories of documents:

1. The original balance sheets, profit and loss statements, and the general ledger account of retained earnings for West Coast International Limited ("WCI") for the years of 1993 through 1999 inclusive which were delivered to Special Agent Mahoney in January of 2003, as per Attachment B.

2. A copy of any analysis, memorandum or other documents in the possession of the Internal Revenue Service computing the earnings and profits of WCI.

3. Any and all documents reflecting all wire transfers referenced in the RAR regarding WCI . . . .

4. The balance sheets, profits and loss statements, and the general ledger account of retained earnings for West Coast International (Parking) Limited ("WCIP") for the years 1993 through 1999 inclusive which were delivered to Special Agent Mahoney in January of 2003 as per Attachment D.

. . . . .

5. A copy of any analysis, memorandum or other documents in possession of the United States and its agencies computing the earnings and profits of WCIP.

6. Any and all documents reflecting all wire transfers referenced in the RAR regarding WCIP per Attachment B.

(Id.) The categories of documents requested pursuant to the Entity Request are the same as the first six categories of documents requested pursuant to the Cheung Request. The IRS denied the Entity Request. (Id. at 13-15.) Mr. Shannahan appealed the denial. (Id. ¶ 16.) The IRS appeals office denied the appeal. (Id. at 18-20.)

E. FOIA Actions

On March 20, 2008, Mr. Shannahan filed four FOIA actions. The actions on behalf of Mr. Cheung and Ms. Su, Case Nos. C08-561JLR and C08-560JLR, respectively, were consolidated under Case No. C08-560JLR while the actions on behalf of WCI and WCIP, Case Nos. C08-452JLR and C08-562JLR, respectively, were consolidated under Case No. C08-452JLR. On December 3, 2008, the IRS filed a motion for summary judgment (Dkt.# 32) in Case No. C08-452JLR.1 The IRS argues that it satisfied its obligations under FOIA and properly withheld responsive documents pursuant to Exemptions 3, 5, 6, 7(A), 7(C), and 7(D). (Mot.(Dkt.# 32) at 9-22.) In the alternative, the IRS contends that the fugitive disentitlement doctrine supports dismissal. (Id. at 22-25.)

The IRS states that it has located 5,088 pages of documents, as well as an electronic database consisting of 373 files and 35.7 megabytes of information, responsive to the Entity Request. (Mot. at 3.) The IRS released 316 pages of documents to Mr. Shannahan, leaving a total of 4,772 pages of documents, as well as the electronic database, at issue in this case. The IRS characterizes the responsive documents as falling within five categories:

(1) Examination Workpapers Documents (42 pages): "The Examination Workpapers documents address a summary of findings of one issue being examined by IRS Examination and often serves as a coversheet for the revenue agent's work papers . . . relating to that particular issue. The Examination Workpapers are each supported by pages consisting of the revenue agent's working papers, e.g., notes, calculations, findings and conclusions. . . . The Examination Workpapers documents were created by the Internal Revenue Service . . . during the civil examination of the Cheungs and were based largely upon information obtained during the U.S. Attorney's criminal investigation of the Cheungs." (Mahaney Decl. ¶ 16.)

(2) Agents' Working Papers (4,721 pages): These documents consist of "revenue agents' and special agents' notes, categorizations, analysis, research, calculations, and summaries." (Id. ¶ 17.)(A) "The Working Papers obtained from IRS Exam are documents that were prepared or gathered by the revenue agents as part of his or her determination of the Cheungs' correct income tax liability and were largely obtained from information provided from the criminal investigation of the Cheungs. These Working papers consist of the revenue agent's findings and research as to each of the topics covered by the primary Examination Workpapers documents." (Id.) (B) "The Working Papers obtained from IRS Criminal Investigation are documents that were prepared or gathered by the special agent as part of her determination of the Cheungs' potential criminal tax liability. These Working Papers consist of the special agent's findings and research as to the potential criminal liability of the Cheungs as well as documented evidence obtained for purposes of the criminal proceeding." (Id.)

(3) Interview Notes, Third Party Contacts, and Contact Sheets (2 pages): These documents consist of "interview notes for interviews and agendas conducted with third party witnesses and proposed interview questions for the Cheungs." (Id. ¶ 18.) "Included within the Interview Notes and Third Party Contact Information are questions formulated prior to the interviews, handwritten notes taken during or after the interviews, and typed notes transcribed from handwritten notes. All of the Interview Notes and Third Party Contact Information were based on information gathered during the criminal investigation and any actual interviews that took place were part of the criminal investigation." (Id.)

(4) Internal Correspondence (7 pages): These documents...

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