In re: United States of America

Filing 14

MEMORANDUM. Signed by Judge Sue L. Robinson on 6/18/2015. (fms)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

HONG DENG and TINA YANG,
Petitioners,
v.
UNITED STATES OF AMERICA,
Respondent.

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) Misc. No. 14-187-SLR
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MEMORANDUM
At Wilmington this i&rday of June, 2015, having heard argument on, and having
reviewed the petition filed by Hong Deng and Tina Yang ("petitioners") to quash a thirdparty summons issued by the Internal Revenue Service ("IRS"), as weill as the papers
filed in connection therewith, the petition to quash (D.I. 1) will be deniHd for the reasons
that follow:
1. Background. The IRS is presently investigating petitioners' federal tax
liability for tax years 2011 and 2012 and has requested bank records related to
petitioner Hong Deng's ("Deng") law practice. Deng advises clients on criminal defense
matters. Deng asserted the attorney-client privilege over the identities of his clients and
provided copies of the requested records after redacting client names and account
numbers. In response to Deng's refusal to provide unredacted copies, Gloria A.
Mendoza ("Agent Mendoza"), a California-based Revenue Agent with the IR:S, issued
an IRS third-party summons to Bank of America for the bank records of Deng's attorney

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trust account. Petitioners timely filed their petition to quash. (D.I. 1.) The court has
jurisdiction pursuant to 26 U.S.C. § 7609.
2. Legal standard. Title 26 of the United States Code section 7601 gives the
IRS a mandate to investigate "persons ... who may be liable" for taxe~s. To enforce this
mandate, the IRS has been given the power to examine records, to issue summonses
(to the taxpayer or to a third party), and to take testimony for purposes of: (a)
ascertaining the correctness of any tax return; (b) making a tax return where none has
been made; (c) determining the tax liability of any person; (d) collecting a tax liability; or
(e) inquiring into any offense connected with the administration or enforcement of the
internal revenue laws. 26 U.S.C. § 7602; see Donaldson v. United States, 400 U.S.
517, 523-24 (1971), abrogated on other grounds by26 U.S.C. § 7609.
3. Once the legality of a summons is questioned, it is the burclen of the IRS to
demonstrate the following: (a) the summons was issued for a legitimate purpose; (b) the
summons sought information that may be relevant to that purpose; (c) the information
sought was not already within the possession of the IRS; and (d) all administrative
requirements were met. See United States v. Clarke,_ U.S._, 134 S. Ct. 2361,
2365 (2014) (citing United States v. Powell, 379 U.S. 48, 57-58 (1964)). In addition,
there must not have been any criminal referrals to the Justice Department regarding the
taxpayer. See 26 U.S.C. § 7602(d); United States v. Garden State Nat'/ Bank, 607 F.2d
61, 68-69 (3d Cir. 1979); Godwin v. United States, 564 F. Supp. 1209, 1213-14 (D. Del.
1983).
4. Analysis. The declaration of Agent Mendoza satisfies each of the above
requirements:

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a. Legitimate purpose. Agent Mendoza issued the summons for the
legitimate purpose of determining petitioners' federal tax liability for tax years 2011 and
2012. (D.I. 5, ex. 1at1{1f2, 4); see 26 U.S.C. § 7602.
b. Relevant information. The bank records sought from Barik of
America may be relevant to determining petitioners' tax liability for tax years 2011 and
2012 by, e.g., revealing whether certain deposits are taxable or the existence of other
bank accounts owned by petitioners that are currently unknown to the1 IRS. (D.I. 5, ex. 1
at~

8); see Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310, 323 (198fi); Azis v.

IRS, 522 F. App'x. 770, 775 (11th Cir. 2013).
c. Information not in possession of IRS. The IRS se1eks information to

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help it verify the transactions from Deng's attorney trust account. Agent Mendoza
averred that the transactions cannot be verified from redacted records. (D.I. 5, ex 1 at~
8)
d. Administrative requirements met. A third-party summons issued by
the IRS may be served by certified or registered mail to the last known address of the
summoned party. See 26 U.S.C. § 7603(b). Agent Mendoza complied with the service
requirement by sending a copy of the summons via certified mail to "Bank of the
America NA legal Order processing, PO Box 15047, Wilmington, Delaware, 198505047."1 (D.I. 5, ex. 1 at ex. 101) The IRS is also required to provide noticei of such a
third-party summons to the taxpayer. See 26 U.S.C. § 7609(a). AgEmt Mendoza
complied with this notice requirement by contemporaneously sendin1;i a copy of the

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Although the summons mistakenly identified Bank of America as "Bank of the
America," this error created no confusion. Petitioners offer no authority supporting their
claim that a typo provides a sufficient basis for quashing the summons.

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summons to petitioners via certified mail at his last known address. (D.I. 5, ex. 1 at ex.
102)
e. No referral. No summons may be issued or enforced if (i) the IRS has
recommended to the Attorney General either a grand jury investigation or the criminal
prosecution of a taxpayer, or (ii) the Department of Justice has requested an individual's
tax return information from the IRS pursuant to 26 U.S.C. § 6103(h)(3)(B). See 26
U.S.C. § 7602(d)(2). Agent Mendoza averred that there was no Justice Department
referral in effect with respect to petitioners at the time she mailed the summons and
signed the declaration. (D.I. 5, ex. 1

at~

12)

5. Because the IRS has met its burden to show that the requirements for a valid
summons have been met, the burden shifts to petitioners to show, through
particularized factual averments, that the IRS is not acting in good faith or that
enforcement of the summons would constitute an abuse of the court's process. See
Garden State, 607 F.2d at 71; Godwin, 564 F. Supp. at 1213. Petitioners have failed to
meet this burden through their allegations.
a. Attorney-client privilege. 2 The Supreme Court has found no
legitimate expectation of privacy in the contents of records maintained by banks. See
United States v. Miller, 425 U.S. 435, 442-43 (1976). In the Third Circuit, "the attorneyclient privilege is not applicable to bank records merely because they derive from
transactions involving an attorney's trust account." Gannet v. First State Bank of New
Jersey, 546 F.2d 1072, 1076 (3d Cir. 1976). The privilege is preserved, however, if an
attorney's client-identifying bank records will reveal the substance of attorney-client
communications. See United States v. Liebman, 742 F.2d 807, 809 (3d Cir. 1984). A
2

(D.I. 1 at ml 22-23, 25; D.I. 7 at 2-4)

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bare list of clients who paid fees does not fall within the privilege unless such a list
would "automatically identify" unknown clients with a known communication. Id. The
fact that Deng's clients all sought advice regarding pending or potential criminal
proceedings simply identifies the general context for which Deng's cliEmts sought
counsel. 3 This common general context does not present sufficient risk that the
unredacted bank records will reveal specific communications or conduct. 4 Additionally,
because specific communications will not be revealed, petitioners have not supported
their allegation that the summons operates as a pretext for a collateral investigation into
Deng's clients. 5 Under these circumstances, the attorney-client privilege does not
apply.

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Petitioners allege that each client consulted Deng to obtain legal acjvice about
either (i) the client's own criminal liability while also paying for Deng's representation of
another client who allegedly participated in the same offense or (ii) the client's own
criminal liability regarding conduct for which no charges had been brought.
4
Petitioners' citations to the "last link" doctrine are inapposite because petitioners
have not shown that the bank records represent the last link in a chain of evidence
necessary to convict a criminal defendant. See Liebman, 742 F.2d at 810 n.2
(describing the doctrine as applicable "when the client's identity furnishes the 'last link'
in a chain of incriminating evidence that would result in the client's indictment").
Moreover, Liebman casts doubt on whether the last link doctrine is good law in the Third
Circuit. The Court explained that it did not rely on the last link doctrine to reach its
conclusion and noted that the doctrine "appears to go further in sustaining the privilege
than we were willing to accept" in a prior case. Id.
5
In the cases petitioners rely on, the government sought to implicate unknown
clients in an existing investigation. See, e.g., Liebman, 742 F.2d at B09 (noting that the
IRS sought client-identifying bank records solely to investigate whether the firm's
erroneous legal advice resulted in tax liability for clients who were not otherwise under
investigation); In re Grand Jury Subpoena for Attorney Representing Criminal
Defendant Reyes-Requena, 926 F.2d 1423, 1425-29 (5th Cir. 1991) (concluding that
the identity of an anonymous client financing a criminal defendant's defense would not
help the government prosecute its case but would only link the unknown client to the
defendant's alleged criminal activity). Unlike in Liebman and Reyes-Requena, the
contested information here lacks a specific context that would implicate Deng's clients.

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b. Information not in possession of IRS. 6 Although Deng pmvided the
requested bank records with redactions, the IRS has the right to obtain the original
copies of the records from a third party. See Cohen v. United States, 306 F. Supp. 2d
495, 504-05 (E.D. Pa. 2004).
c. Administrative compliance. 7 Petitioners argue that§ 760B requires
the IRS to provide the taxpayer with an identical copy of the third-party summons. This
view is not supported by authority in petitioners' briefs and is contrary to the prevailing
view. See, e.g., Kondik v. U.S., 81 F.3d 655, 657 (6th Cir. 1996) ("[W]e hold that§ 7609
requires only that taxpayers be served with copies, not attested copies .... ").
d. Relevant information. 8 When evaluating the releva1nce of summoned
information, courts apply a deferential standard of review that permits any document
that "might throw light upon the correctness of the return." United Sttites v. Arthur

Young & Co., 465 U.S. 805, 814 n.11 (1984) (quoting United States

\1.

Harrington, 388

F.2d 520, 524 (2d Cir. 1968)). The standard requires only a showing of potential
relevance because the IRS "can hardly be expected to know whethe1· such data will in
fact be relevant until they are procured and scrutinized." Arthur Young & Go., 465 U.S.
at 814 (citation omitted). Petitioners allege that each transaction listed in the redacted
bank records involved taxable income. Given this admission, petitioners contend that
the transaction amounts are the only portion of the bank records relevant to the audit.
This argument assumes that the IRS would only use the redacted names to determine
whether each transaction is taxable. The government has explained that the client
names could lead the IRS to bank accounts that were not disclosed on petitioners'
6
7

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(D.I. 1 at~ 24; D.I. 7 at 5)
(D.I. 1 at~ 27; D.I. 7 at 7 n.3)
(D.I. 7 at 6)

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return. (D.I. 10 at 3); see Azis, 522 F. App'x. at 775 (recognizing the possibility of
undisclosed bank accounts as relevant information). Since additional bank accounts
migM affect the audit, petitioners have failed to rebut the government's demonstration
that the redacted client names are potentially relevant.
e. Good faith. 9 Obtaining the evidence required to invalidate a summons
issued in bad faith usually requires the court to order limited discovery into the purpose
of the summons. See United States v. Cortese, 614 F.2d 914, 921 n:12 (3d Cir. 1980).
To reach discovery, petitioners must "make a showing of facts that give rise to a
plausible inference of improper motive." Clarke, 134 S. Ct. at 2367-68. To prevail,
petitioners must prove that the improper motive is institutionally attributable to the IRS
and not merely personally attributable to the revenue agent who issueid the summons.
See Garden State, 607 F.2d at 68. Petitioners allege that Agent Mendoza "wanted the
client information for some purpose other than determining Deng's income, such as
investigating Deng's clients or assisting other agencies in investigating Deng's clients."
(D.I. 7 at 7) Petitioners assert that Agent Mendoza's questions regarding Deng's
practice area, the race and ethnicity of Deng's clients, and the source of funds in the
trust account support this theory. (D.I. 7, ex. 1 at 1J1J 10, 18, 28) The court concludes
that these facts are insufficient to give rise to a plausible inference of any other purpose
than investigating the petitioners.
6. Conclusion. For the reasons stated, the petition to quash is denied. An
order shall issue.

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(D.I. 7 at 6-7)

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