Viewtech, Inc., et al v. USA, et al

Filing

FILED OPINION (DOROTHY W. NELSON, SANDRA S. IKUTA and LAWRENCE L. PIERSOL) AFFIRMED. Judge: SSI Authoring, FILED AND ENTERED JUDGMENT. [7850861]

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FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
VIEWTECH, INC., a California
corporation; JUNG KWAK, an
individual,
Petitioners-Appellants,
v.
UNITED STATES OF AMERICA;
COMMISSIONER OF INTERNAL
REVENUE SERVICE,
Respondents-Appellees.




No. 09-56808
D.C. No.
3:09-cv-01606-IEGCAB
OPINION



Appeal from the United States District Court
for the Southern District of California
Irma E. Gonzalez, Chief District Judge, Presiding
Submitted June 7, 2011*
Pasadena, California
Filed August 10, 2011
Before: Dorothy W. Nelson and Sandra S. Ikuta, Circuit
Judges, and Lawrence L. Piersol, Senior District Judge.**
Opinion by Judge Ikuta

*The panel unanimously concludes this case is suitable for decision
without oral argument. See Fed. R. App. P. 34(a)(2).
**The Honorable Lawrence L. Piersol, Senior District Judge for the
District of South Dakota, sitting by designation.

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COUNSEL
David R. Clark, The Clark Law Firm, Meadow Vista, California, for appellants Viewtech, Inc. and Jung Kwak.

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VIEWTECH, INC. v. UNITED STATES

Gretchen M. Wolfinger, United States Department of Justice,
Washington, DC, for appellee the United States of America.

OPINION
IKUTA, Circuit Judge:
In 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 a related third party’s account
information. The taxpayer and third party argue that 26
U.S.C. § 76091 required the IRS to notify them, which would
have enabled them to seek a court order quashing the summons. Applying Ip v. United States, 205 F.3d 1168 (9th Cir.
2000), we conclude that under the circumstances of this case,
no notice was necessary, and therefore we affirm the district
court.
I
After the IRS assessed Jung Kwak for some $3 million in
federal income taxes for the year ending December 31, 2007,
the IRS’s efforts to locate assets to satisfy this assessment led
it to Viewtech, a California Subchapter S corporation,2 in
which Kwak had extensive involvement. The government’s
investigation showed that Viewtech’s finances were significantly intertwined with Kwak’s. Kwak owned 100 percent of
the shares of Viewtech in 2007, and 97 percent of its shares
in 2008. Kwak received almost $14 million in income, interest, expenses, and wages from Viewtech in 2007, and some
$1.7 million in 2008. In addition to these payments to Kwak,
1

Unless otherwise noted, all statutory references are to Title 26 of the
United States Code.
2
Subchapter S status means, among other things, that all of the corporation’s income flows directly to the corporation’s shareholders without first
being taxed as corporate income.

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Viewtech directly paid more than a million dollars of Kwak’s
personal federal income tax for 2007 and 2008. The financial
outlays were not wholly one-sided, however: twice in 2007
and twice again the following year, Kwak deposited significant sums of cash (a total of approximately $675,000) into
Viewtech’s Wells Fargo account. The next year, in addition
to paying Kwak his regular salary, Viewtech transferred
$180,000 from its own bank account into Kwak’s personal
bank account.
After determining that Viewtech maintained its bank
account at Wells Fargo Bank, the IRS exercised its authority
under § 7602(a) to issue a summons to the bank for records
and testimony regarding Viewtech’s account. On July 24,
2009, Kwak and Viewtech filed a motion to quash the summons. The government moved to dismiss the motion pursuant
to Federal Rule of Civil Procedure 12(b)(1), arguing that
§ 7609 did not give Kwak or Viewtech standing to challenge
the summons and that the district court accordingly lacked
subject matter jurisdiction over the case. The district court
agreed and dismissed the motion to quash, and Kwak and
Viewtech timely appealed.
We review the district court’s grant of a motion to dismiss
under Rule 12(b)(1) de novo, Ip, 205 F.3d at 1170, and review
factual findings relevant to that determination for clear error.
A-1 Ambulance Serv., Inc. v. California, 202 F.3d 1238, 1243
(9th Cir. 2000).
II
[1] The IRS’s statutory power to summons persons, information, and documents is set forth in two provisions, 26
U.S.C. § 7602 and § 7609. In connection with an investigation
of 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

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such testimony, under oath, as may be relevant or material to
such inquiry.” § 7602(a)(2).
[2] The IRS’s efforts to collect on a tax assessment frequently lead it to third parties (i.e., individuals or businesses
other than the assessed taxpayer), on suspicion that the taxpayer may be trying to conceal assets in the accounts, holdings, or property of the third party. See, e.g., Ip, 205 F.3d at
1170-71. After the IRS issues a summons to the bank for the
third party’s records, it must determine whether either the taxpayer or the third party account owner is entitled to notice of
the summons. See § 7609(a); Ip, 205 F.3d at 1171. 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.3 The issue of who gets
notice is highly significant because only a person who is entitled to notice may bring a proceeding to quash such a summons. See § 7609(b)(2)(A).
Section 7609(c)(2) sets out the exceptions to the general
rule that the IRS must give notice to third parties (which
3

Section 7609(a)(1) states:
If any summons to which this section applies requires the giving
of testimony on or relating to, the production of any portion of
records made or kept on or relating to, or the production of any
computer software source code (as defined in 7612(d)(2)) with
respect to, any person (other than the person summoned) who is
identified in the summons, then notice of the summons shall be
given to any person so identified within 3 days of the day on
which such service is made, but no later than the 23rd day before
the day fixed in the summons as the day upon which such records
are to be examined. Such notice shall be accompanied by a copy
of the summons which has been served and shall contain an
explanation of the right under subsection (b)(2) to bring a proceeding to quash the summons.

26 U.S.C. § 7609(a)(1).

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allows them to bring a proceeding to quash). Relevant here,
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).”
§ 7609(c)(2)(D). (For purposes of clarity, we refer to these
exceptions individually as the “clause (i) exception” and the
“clause (ii) exception.”) Under the plain language of the
clause (i) exception, 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.
As we noted in Ip, this plain language reading of 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.” 205 F.3d at 1174. Therefore, Ip declined to
adopt a literal reading of clause (i)’s language.4
In Ip, the IRS made an assessment against Diamond Trade,
a Hong Kong corporation that operated in the United States
4

Ip dealt with a prior version of § 7609, which, for present purposes, is
not materially different from the current version. Until 1998, the relevant
provision, 26 U.S.C. § 7609(c)(2) (1994), read, in pertinent part:
A summons shall not be treated as described in this subsection if
—
...
(B) it 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).

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through its agents, Chun Lung Siu and two family members,
but did not pay taxes here. Id. at 1169-71. The IRS suspected
Siu’s fiancee, Ip, of depositing Diamond Trade sales proceeds
into her bank accounts at Bank of America and Cathay Bank,
and then wiring money to Hong Kong. Id. at 1169, 1171. The
IRS issued a summons to the two banks for records relating
to Ip’s account. Id. at 1171. Ip moved to quash the summons,
but the district court dismissed, concluding that she fell within
§ 7609’s exceptions to the notice requirement and therefore
lacked standing to move to quash the summons. Id.
We reversed. After conducting a detailed review of
§ 7609’s language, legislative history, and other circuits’
interpretations of the statute, we rejected the IRS’s contention
that it did not need to provide notice to any third parties when
it issued a summons “in aid of the collection” of a tax assessment. Id. at 1174. We explained that Congress enacted § 7609
for the purpose of giving third parties notice that the IRS was
summonsing their records, and enacted § 7609(c)’s exceptions
to the notice requirement based solely on its recognition “that
giving taxpayers notice in certain circumstances would seriously impede the IRS’s ability to collect taxes,” as would giving notice to fiduciaries or transferees of the taxpayer. Id. at
1172. Therefore, we concluded that the clause (i) exception
should be given a limited reading to avoid vitiating the legislative purpose. Id.
In determining the proper scope of the clause (i) exception,
we considered decisions from two other circuits which upheld
the IRS’s decision to refrain from notifying a third party
whose records were being summoned. See id. at 1173-74 (citing Barmes v. United States, 199 F.3d 386, 389-90 (7th Cir.
1999) (per curiam) and Davidson v. United States, 149 F.3d
1190 (10th Cir. 1998) (unpublished)). We determined that
these decisions were consistent with our view of the legislative history, because in both cases, there was a close relationship and overlap of interests between the third party and the
taxpayer: In Barmes, the assessed taxpayer was a general part-

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nership, and the third parties were the general partners; in
Davidson, the third party was the spouse of the assessed taxpayer and held her spouse’s funds in the summoned bank
account. See id. at 1174.
[3] Based on this review, we derived the rule 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.” Id. at 1175; see id. at 1176. Ip
applied this test non-technically when considering the parties’
relationships to one another. For example, in considering
whether a third party could be deemed a fiduciary or transferee of the taxpayer, Ip focused on whether the taxpayer had
transferred funds into the third party’s account, id. at 1174,
1176-77. Similarly, in considering whether a taxpayer had a
sufficient legal interest in the object of the summons, we considered whether there was an employment, agency, or ownership relationship between the taxpayer and third party, id. at
1176.
In light of this analysis, we concluded that Ip was entitled
to notice. First, she was not the taxpayer. See id. at 1176. Second, the IRS’s affidavit did not state that Ip had deposited the
assessed taxpayer Diamond Trade’s funds into her account,
and therefore we could not properly conclude she was a fiduciary or transferee of the taxpayer. Id. Third, we held that
“[b]ecause the account is in Ip’s name and she is not an
employee, officer, agent or stockholder in the entity against
which the tax assessment has been made, the [IRS’s] declaration does not prove the assessed taxpayer Diamond Trade had
the legal ownership interest mandated by clause (i).” Id.
III
[4] We apply the same analysis here. Our inquiry is
straightforward as to Kwak. He is the assessed taxpayer, and

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therefore is disqualified from notice under § 7609(c)(2)(D)(i).
See id. at 1172-73. Applying the test to Viewtech, we must
consider whether for purposes of § 7609(c)(2), Viewtech
could be deemed a fiduciary or transferee of Kwak or whether
Kwak had a sufficient legal interest in the object of the summons, i.e., Viewtech’s bank account.
[5] Under the Ip standard, Kwak had a sufficient interest
in the Viewtech account to disqualify Viewtech from receiving notice under § 7609(c)(2). As noted above, Kwak had a
significant ownership interest in Viewtech. As a 100 percent
and 97 percent shareholder of a Subchapter S corporation, he
was entitled to substantially all of Viewtech’s income. Kwak
was also a Viewtech employee and an officer of the corporation during some periods. This close legal relationship is sufficient to give Kwak the requisite interest in the Viewtech
bank account such that Viewtech is disqualified from receiving notice under the clause (i) exception. Moreover, there was
evidence that Kwak had transferred funds into the Viewtech
account. The IRS presented evidence not only that Kwak
directly deposited nearly $700,000 of his own funds into the
Viewtech account, but also that Viewtech paid a portion of
Kwak’s federal income tax and transferred $180,000 into
Kwak’s personal account, thereby indicating that at least
some of the funds in the Viewtech account were for Kwak’s
use. The evidence that Viewtech’s account held Kwak’s funds
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.
[6] Because the summons in question was issued in aid of
the collection of Kwak’s previously assessed tax deficiency,
and because both Kwak and Viewtech are covered by the
exceptions to notice set forth in § 7609(c)(2)(D), neither was
entitled to notice of the summons. Therefore, neither had
standing to quash it.
AFFIRMED.