UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF CALIFORNIA
October 16, 2009
VIEWTECH, INC., A CALIFORNIA CORPORATION, AND JUNG KWAK, AN INDIVIDUAL, MOVANTS,
UNITED STATES OF AMERICA, RESPONDENT.
The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court
Order Granting Respondent's Motion to Dismiss
Movants, Viewtech, Inc. and Jung Kwak, have filed a motion to quash an Internal Revenue Service ("IRS") summons dated June 25, 2009. The third-party summons was issued in furtherance of an IRS investigation of Movant Jung Kwak's ability to pay previously assessed federal income tax liability totaling over $3 million. The summons calls for production by Wells Fargo Bank in Oceanside, California, of the bank account records of Viewtech, Inc. for the time period January 1, 2009 through May 31, 2009.
The government has moved to dismiss this action, arguing Movants are not parties entitled to notice of the summons under 26 U.S.C. § 7609(c)(2)(D)(i), and thus lack standing to move to quash the summons. Movants have filed an opposition to the government's motion to dismiss.
The Court finds the motions appropriate for submission on the papers and without oral argument. For the reasons set forth herein, the Court GRANTS the government's motion to dismiss.
Revenue Officer Susan LaRoche is conducting an investigation into Jung Kwak's ability to satisfy an outstanding federal income tax liability of over $3 million. [Declaration of Revenue Officer LaRoche in Support of Motion to Dismiss ("LaRoche Decl."), ¶ 2.] On June 25, 2009, Revenue Officer LaRoche issued a summons to Wells Fargo Bank, for records and testimony regarding a specified account held in the name of Petitioner Viewtech, Inc. [Id., ¶ 3; Exhibit A.] The summons called for production of all records regarding the specified account for the time period January 1, 2009 through May 31, 2009. Revenue Officer LaRoche served the summons upon Wells Fargo Bank on the date it was issued.
On July 24, 2009, the account holder, Viewtech, Inc., and the assessed taxpayer, Jung Kwak, filed a motion to quash the summons pursuant to 26 U.S.C. § 7602, et seq.*fn1 On September 24, 2009, the government filed a motion to dismiss this action, arguing Petitioners lack standing to move to quash the summons. Petitioners have filed an opposition to the motion.
The government moves to dismiss the petition under Fed. R. Civ. P. 12(b)(1) for lack of jurisdiction. The United States is immune from suit unless there is a valid waiver of sovereign immunity. Valdez v. United States, 56 F.3d 1177, 1179 (9th Cir. 1995). The only statute providing the court with jurisdiction to quash an IRS summons is 26 U.S.C. § 7609(b). Section 7609(b), therefore, is the exclusive method by which a taxpayer can challenge a summons issued by the IRS to a third-party recordkeeper. Ponsford, 771 F.2d 1305, 1309 (9th Cir. 1985).
Only those persons entitled to notice of the summons pursuant to § 7609 have standing to move to quash the summons. 28 U.S.C. § 7609(b)(2)(A); Ip v. United States, 205 F.3d 1168, 1170 (9th Cir. 2000). Although the IRS is required to give notice of the issuance of a third-party summons in many circumstances, it is not required to give notice where the third-party summons is issued "in aid of the collection of -- (i) an assessment made . . . against the person with respect to whose liability the summons is issued . . . ." 26 U.S.C. § 7609(c)(2)(D).
In this case, there is no dispute the summons was issued to a third party in aid of collection of an IRS assessment of federal tax liability against Jung Kwak. Thus, under § 7609(c)(2)(D), Mr. Kwak was not entitled to notice of the summons and he lacks standing to move to quash the summons.
The IRS has not made an assessment of tax liability against Viewtech, Inc. In its motion to dismiss, however, the IRS argues it has evidence in its possession suggesting Mr. Kwak has a "recognizable legal interest in the records summonsed." Ip, 205 F.3d at 1176. In Ip, the Ninth Circuit addressed the question of when an individual has standing to challenge an IRS summons concerning his own records in connection with collecting a tax assessment from another individual or entity. The Ninth Circuit noted Congress's desire to balance the IRS's need to expeditiously obtain information in furtherance of its enforcement of an assessed tax liability with the right of certain individuals to receive notice before a third-party produces private documents in response to an IRS summons. Id. at 1172-73. The Court noted that "Congress also recognized that to give notice to a person who is a fiduciary or transferee of an assessed taxpayer gives rise to a heightened risk of tax fraud." Id. at 1173 (citing § 7609(c)(2)(D)(ii)). The Court concluded that the "assessed taxpayer" notice exception applied only where the summonsed party "had recognizable legal interests in the accounts summonsed or ... had fiduciary relationships with the person against whom an assessment was made." Id. at 1174.
Here, the government argues Viewtech has a significant legal relationship with Mr. Kwak, sufficient to bring the company within the exception-to-notice provisions of § 7609(c)(2)(D). In particular, the government has provided the declaration of Revenue Officer LaRoche establishing the following:
* In 2007, Mr. Kwak was the 100% shareholder of Viewtech and received $12,645,377 in ordinary income, $145,181 in interest income, $45,473 in expenses, and $1,343,461 in wages from the company [LaRoche Decl., ¶ 5].
* In 2008, Mr. Kwak was the 97% shareholder of Viewtech and received $1,419,386 in ordinary income, $65,891 in interest income, $153,542 in expenses, and $184,999 in wages from the company [Id.].
* On March 4, 2009 and on April 8, 2009, Viewtech transferred $30,000 and $150,000 respectively from the summonsed bank account into Mr. Kwak's personal checking account. These transfers were in addition to deposits into Mr. Kwak's account on March 13 and April 16, 2009, in the amounts of $4,476 and $4,467, that appear to represent his salary from the company [Id., ¶ 8].
* In 2007 and 2008, five checks in the amounts of $500,000, $186,320, $186,320, $17,128.78, and $236,935 were drawn from Viewtech's checking account to partially satisfy Mr. Kwak's personal federal income tax liabilities for 2006 and 2007 [Id. at ¶ 9].
* On two occasions in 2006 and on another two occasions in 2008, Mr. Kwak deposited significant sums of cash into Viewtech's summonsed account ($250,000, $36,000, $290,000, and $100,000) [Id. at ¶ 10].
The government argues these transactions show there is a relationship between Mr. Kwak, his financial affairs, and Viewtech. The government argues these transactions demonstrate Mr. Kwak has an interest in Viewtech's bank account, and Viewtech is the nominee, alter ego, or transferee of Mr. Kwak.*fn2
In reply, Viewtech argues the periodic distribution of funds to Mr. Kwak was in consideration for the services he rendered as an employee or officer of Viewtech. In addition, Viewtech argues Mr. Kwak's deposits of capital into Viewtech, as a partial owner of the company, does not establish that Mr. Kwak has a recognizable legal interest in Viewtech's bank account. According to the declaration submitted by Viewtech in support of its motion to quash the summons, Viewtech has other owners aside from Mr. Kwak, and has independent officers and directors. [Declaration of Robert E. Rhine in Support of Motion to Quash ("Rhine Decl."), ¶ 5.] Viewtech has approximately a dozen employees and does millions of dollars of business with hundreds of other entities. [Id. at ¶ 6.] The summonsed bank account is Viewtech's primary operating account. [Id. at ¶ 7.] Mr. Kwak does not have individual access to or authority to use Viewtech's funds, held in the referenced account, without approval by Viewtech's management, and Mr. Kwak does not have the ability to cause distributions to be made from the referenced account. [Id. at ¶¶ 8 and 9.]
Notwithstanding Viewtech's arguments, the Court is persuaded that the government has produced sufficient evidence establishing the assessed taxpayer, Mr. Kwak, has a recognizable legal interest in the subject Viewtech bank account. Viewtech does not dispute the government's assertion that Mr. Kwak held a 100% ownership interest in the company in 2007 and a 97% interest in 2008. Although Viewtech states it has other owners, it does not attempt to demonstrate Mr. Kwak's ownership interest in the company significantly declined in 2009. Although Viewtech states Mr. Kwak does not have the ability to cause distributions to be made from the referenced account, it does not offer any explanation for the fact $1,126,704 was paid out of the subject account in 2007 and 2008 to partially satisfy Mr. Kwak's personal federal income tax liabilities. Finally, Viewtech does not dispute that Mr. Kwak directly deposited $676,000 to Viewtech's account between 2006 and 2008. Based thereon, the Court finds the government has established Mr. Kwak has a recognizable legal interest in Viewtech sufficient to bring the company within the exception-to-notice provision of 26 U.S.C. § 7609(c)(2)(D). Viewtech was not entitled to notice of the summons, and thus lacks standing to move to quash the summons.
For the reasons set forth herein, the Court concludes Movant Jung Kwak, as the assessed taxpayer, and Movant Viewtech, Inc., a company in which Mr. Kwak has a recognizable legal interest, were not entitled to notice of the IRS summons under 26 U.S.C. § 7609(c)(2)(D) and thus lack standing to move to quash the summons. The Court GRANTS the government's motion to dismiss. The Clerk may close this case.
IT IS SO ORDERED.