Shannahan v. Internal Revenue Serv., s. 10–35204

• Citation: 12 Cal. Daily Op. Serv. 2953,672 F.3d 1142,2012 USTC P 50239,109 A.F.T.R.2d 2012,2012 Daily Journal D.A.R. 3295
• Decision Date: 13 March 2012
• Docket Number: Nos. 10–35204,10–35244.,s. 10–35204
• Parties: William P. SHANNAHAN, Plaintiff–Appellant, v. INTERNAL REVENUE SERVICE, a federal agency, Defendant–Appellee.William P. Shannahan, Plaintiff–Appellant, v. Internal Revenue Service, a federal agency, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

109 A.F.T.R.2d 2012-1377

12 Cal. Daily Op. Serv. 2953

2012 Daily Journal D.A.R. 3295

2012-1 USTC P 50,239

672 F.3d 1142

William P. SHANNAHAN, Plaintiff–Appellant,

v.INTERNAL REVENUE SERVICE, a federal agency, Defendant–Appellee.William P. Shannahan, Plaintiff–Appellant,

v.Internal Revenue Service, a federal agency, Defendant–Appellee.

Nos. 10–35204

10–35244.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted June 9, 2011.Filed March 13, 2012.

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

Randolph Lyons Hutter, Carmen M. Banerjee, Jonathan S. Cohen, Nicole Maria Elliott, United States Department of Justice, Washington, D.C., Robert P. Brouillard, Office of the United States Attorney, Seattle, WA, for the appellee.

Appeal from the United States District Court for the Western District of Washington, James L. Robart, District Judge, Presiding. D.C. Nos. 2:08–cv–00560–JLR, 2:08–cv–00452–JLR.Before: STEPHEN REINHARDT, WILLIAM A. FLETCHER, and JOHNNIE B. RAWLINSON, Circuit Judges.

OPINION

W. FLETCHER, Circuit Judge:

We are asked to decide whether appellants are entitled under the Freedom of Information Act (“FOIA”) to disclosure of tax-related documents held by the Internal Revenue Service (“IRS”). The government resisted the disclosure of the documents on two grounds. First, it contended that disclosure of the documents would “seriously impair Federal tax administration” within the meaning of 26 U.S.C. § 6103(e)(7) and Exemption 3 of FOIA, 5 U.S.C. § 552(b)(3), and “could reasonably be expected to interfere with enforcement proceedings” within the meaning of Exception 7(A) of FOIA. Id. § 552(b)(7)(A). Second, it contended under the fugitive disentitlement doctrine that the Cheungs have no right to disclosure under FOIA, whether or not the documents qualify under an exemption.

The district court held that the documents are protected from disclosure under Exemptions 3 and 7(A). It did not reach the fugitive disentitlement question. We affirm, based on Exemptions 3 and 7(A). Like the district court, we do not reach the fugitive disentitlement question.

I. Background

On January 28, 2003, Steven Cheung and Linda Su Cheung, husband and wife, were indicted on one count of conspiracy to defraud the United States. The Cheungs are United States citizens. The indictment charged that the Cheungs concealed their ownership of, and millions of dollars of income derived from, businesses owning commercial parking lots in Hong Kong. Steven Cheung was charged in the same indictment with six counts of filing false or fraudulent income tax returns, five counts of filing false foreign bank account reports, and one count of failing to file a foreign bank account report. The indictment alleges that the Cheungs engaged in financial transactions in the United States, Hong Kong, the Marshall Islands, and the British Virgin Islands and “utilized a web of corporations and other entities” in those countries. When they lived in the United States, their principal residence was in Seattle, Washington.

Summonses were issued to the Cheungs in Seattle and Hong Kong and to their defense attorneys in Seattle. The Cheungs did not appear at their February 20, 2003, arraignment in district court. The court then issued warrants for their arrest. According to newspaper reports, Steven Cheung held a press conference in Hong Kong in which he “denounced” the indictment and the investigation. The United States Attorney's office in Seattle has reason to believe that the Cheungs are in Shanghai, China, and that they plan to stay in China indefinitely. China has no extradition treaty with the United States.

When the criminal proceeding stalled because of the Cheungs' fugitive status, the IRS initiated a civil examination of the Cheungs' income tax liability. The IRS does not ordinarily perform a civil examination while criminal proceedings are pending, but the IRS deviated from its standard practice because the Cheungs are fugitives. IRS Revenue Agent Ev Stone sent Form 4549–A Income Tax Discrepancy Adjustments to the Cheungs, assessing Steven Cheung about $9.5 million and Linda Cheung almost $8 million in back taxes, including penalties and interest. Form 4549–A is commonly referred to as a “Revenue Agent Report,” or an “RAR.”

Plaintiff William Shannahan is an attorney who represents the Cheungs, as well as two companies allegedly owned by the Cheungs, West Coast International Limited and West Coast International (Parking) Limited (“the Entities”). Shannahan filed timely protest letters with the IRS on behalf of the Cheungs and the Entities. Shannahan asked for the documents on which the assessments were based “[i]n order to allow the Taxpayer[s] the opportunity to refute the adjustments in the RAR and to provide the Taxpayer[s] with fundamental due process.” IRS Supervisory Agent Blake Becker responded in a letter in which he declined to provide the documents. Becker requested in his letter that the Cheungs “appear personally” and “testify under oath” in an interview at the IRS office in Seattle. The Cheungs did not appear for the interview.

Shannahan sent FOIA requests to the IRS on behalf of the Cheungs and the Entities. As to the request on behalf of the Cheungs, the IRS informed Shannahan that it had located 2,932 pages of responsive documents but denied his request based on FOIA Exemptions 3, 5, 7(A), 7(D), and 7(E). As to the request on behalf of the Entities, the IRS informed Shannahan that it located 40 boxes of responsive documents but denied his request based on FOIA Exemptions 3, 5, 7(A), and 7(D). Shannahan appealed the denial to the IRS appeals division. The IRS denied the appeal on the ground that the Cheungs were “fugitives from justice.” Shannahan then filed four separate complaints in his own name in district court, two on behalf of the Cheungs and two on behalf of the Entities, seeking disclosure under FOIA. (The Defendants have not made an objection that the Entities are not taxpayers under 26 U.S.C. § 6103(c).) The district court consolidated the complaints into two cases, one for the FOIA claims brought on behalf of the Cheungs and one for the claims filed on behalf of the Entities. After receipt of the complaints, the IRS identified 5,735 pages of documents and a 35.7 MB electronic database responsive to the complaints. On October 28, 2008, the IRS sent Shannahan ten documents comprising 318 pages. It withheld the remaining 5,417 pages and the electronic database.

The IRS moved for summary judgment in both cases. It argued that the withheld documents were exempt from disclosure under, inter alia, Exemptions 3 and 7(A) of FOIA. 5 U.S.C. §§ 552(b)(3), 552(b)(7)(A). Exemption 3 exempts from disclosure documents that are “specifically exempted ... by statute.” The relevant statute in this case is § 6103(a) of the Internal Revenue Code, which characterizes “returns and return information” as “confidential,” subject to certain exceptions. 26 U.S.C. § 6103(a). One of the exceptions to confidentiality is disclosure to the taxpayer, but only “if the Secretary determines that such disclosure would not seriously impair Federal tax administration.” Id. at § 6103(e)(7). See also Kamman v. IRS, 56 F.3d 46, 48 (9th Cir.1995). Exemption 7(A) exempts from FOIA disclosure records or information compiled for “law enforcement purposes, but only to the extent that the production ... could reasonably be expected to interfere with enforcement proceedings.” The IRS also argued that the suits should be dismissed under the fugitive disentitlement doctrine. See, e.g., Degen v. United States, 517 U.S. 820, 116 S.Ct. 1777, 135 L.Ed.2d 102 (1996); Sun v. Mukasey, 555 F.3d 802 (9th Cir.2009).

The IRS supported its motion with four declarations. The first was by Janet Freeman, an Assistant U.S. Attorney who had been assigned to the criminal investigation and prosecution of the Cheungs. Freeman described a number of documents responsive to Shannahan's FOIA request that were in the possession of the U.S. Attorney's office. Among them were 29 boxes of documents provided by Hong Kong to the United States pursuant to a mutual legal assistance agreement (“MLAA”). There is no standing tax treaty providing for information exchanges between the United States and Hong Kong. Instead, the United States must enter into a new agreement, specific to each criminal tax investigation, for any exchange of information. In addition, she reported finding 42 boxes of files related to the grand jury investigation and 16 boxes of “work product connected to the criminal investigation.”

The second declaration was by Deborah Neyhart, a Special Agent for Criminal Investigations in the Seattle office of the IRS. Neyhart described a 2,722–page Special Agent Report (“SAR”) prepared by now-retired Special Agent Molly Mahoney in connection with the criminal investigation of the Cheungs. The SAR contained a description of the criminal offenses recommended for prosecution, along with a description of the supporting evidence, a witness list, and a summary of anticipated testimony.

The third declaration was by Caesar White, the Supervisory Special Agent for Criminal Investigations in the Seattle office of the IRS. White described five categories of documents responsive to Shannahan's FOIA request: “examination workpapers,” “agent's working papers,” “interview notes, third party contacts and contact sheets,” “internal correspondence,” and the “electronic database.” White stated that disclosure of any documents in these categories would “seriously impair federal tax administration” because it (1) “would allow the Cheungs to determine the nature, direction, scope, and limits of the criminal proceedings, and the strategies and theories being utilized by the government”; (2) “would allow the Cheungs earlier and greater access to information about the proceedings than they would otherwise be entitled to receive”; (3) ...