In Viewtech, Inc. v. United States of America (— F.3d —-, C.A.9 (Cal.), August 10, 2011), the United States Court of Appeals for the Ninth Circuit considered whether the Internal Revenue Service (“IRS”) was required to give notice to a taxpayer-controlled company when “[i]n connection with an assessment of a taxpayer for unpaid taxes, the IRS began searching for the taxpayer’s assets and issued a summons to a bank for [the taxpayer-controlled company’s] account information.” The Court of Appeals held that no notice was necessary because the taxpayer had a sufficient interest in the company’s account to disqualify the company and the taxpayer from receiving notice.
The IRS assessed Jung Kwak (“Kwak”) for approximately $3 million in federal income taxes. While trying to locate Kwak’s assets, the IRS learned of Viewtech, Inc. (“Viewtech”), which is a Subchapter S Corporation in which Kwak owned 100 percent of the shares in 2007 and 97 percent of the shares in 2008. In 2007, Kwak received approximately $14 million in income from Viewtech and in 2008, he received almost $1.7 million. Viewtech also paid more than one million dollars in personal federal income tax for Kwak during that two year period. Kwak also deposited $675,000 into Viewtech’s account at Wells Fargo Bank.
The IRS issued a summons to Wells Fargo Bank to provide records and testimony about Viewtech’s account. Viewtech and Kwak filed a motion to quash the summons. IRS asked the trial court to dismiss the motion to quash on the ground that neither Viewtech nor Kwak had standing to challenge the summons. The trial court agreed with the IRS and dismissed the motion to quash.
The Court of Appeals held that the trial court did not err in dismissing the motion to quash because neither Viewtech nor Kwak had standing to quash the summons. The IRS has power to summons person, information and documents as set forth in 26 U.S.C. § 7602 and § 7609. Section 7602(a) provides, that when investigating “an assessed taxpayer, the IRS may summons any person the IRS deems appropriate and may require that person to appear ‘at a time and place named in the summons and to produce such books, papers, records or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry.'” Because a taxpayer may try to conceal assets, the IRS may have to look at a third party’s account to find assets. The IRS may be required to issue a summons to the bank where the third party account is located. When it issues such a summons, the IRS is required to determine whether the owner of the third party account or the taxpayer is entitled to notice of the summons.
“Section 7609 provides generally that if the IRS asks the person summoned (here, the third party’s bank) for specified information relating to a person identified in the summons (in this example, the third party account owner), the IRS must give that third person notice of the summons.” A proceeding to quash such a summons may only be brought by a person who is entitled to notice. There are exceptions to the general rule that the IRS must provide notice. For example, “the general rule is inapplicable when an IRS summons is ‘issued in aid of the collection of — (i) an assessment made or judgment rendered against the person with respect to whose liability the summons is issued or (ii) the liability . . . of any transferee or fiduciary of any person referred to in clause (i).'” The Court noted that under the plain language of the exception found in clause (i), “if the IRS issues a summons to help it recover on an assessment issued against a taxpayer, the IRS need not give notice to any third party, and therefore no third party would have the power to bring an action to quash the summons.”
However, the Court noted that it had previously declined to adopt a literal reading of the language of clause (i) because “the exception ‘vitiates completely the legislative purpose of providing notice to third parties because it would be difficult to hypothesize any situation where notice would be required once the IRS makes an assessment against any taxpayer and seeks to collect the tax.'” After reviewing other relevant case law, the Court fashioned a rule providing “‘that a third party should receive notice that the IRS has summonsed the third party’s records unless the third party was the assessed taxpayer, a fiduciary or transferee of the taxpayer, or the assessed taxpayer had ‘some legal interest or title in the object of the summons.'” When determining if a taxpayer has “a sufficient legal interest in the object of the summons,” the Court should consider “whether there was an employment, agency, or ownership relationship between the taxpayer and the third party.”
Applying the rule to Kwak’s case, the Court found that he is an assessed taxpayer and therefore he is disqualified from notice by the statute. Also, “Kwak had a sufficient interest in the Viewtech account to disqualify Viewtech from receiving notice under § 7609(c)(2)” because he had a significant ownership interest in the company, was entitled to all of its income, was an employee of Viewtech, and at times, was also an officer of the corporation. Kwak also had transferred funds into the account at issue.
The Court found the fact that some of the funds in Viewtech’s account belonged to Kwak “supports the conclusion that Viewtech was Kwak’s fiduciary or transferee, and therefore Viewtech was also disqualified from receiving notice under the clause (ii) exception.” Accordingly, the Court held that neither Kwak nor Viewtech were entitled to notice of the summons, and therefore, neither had standing to quash the summons.
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