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William P. Shannahan v. Internal Revenue Service

March 13, 2012

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.



Appeal from the United States District Court for the Western District of Washington James L. Robart, District Judge, Presiding D.C. No. 2:08-cv-00560-JLR D.C. No. 2:08-cv-00452-JLR

The opinion of the court was delivered by: Judge William A. Fletcher

FOR PUBLICATION

OPINION

Argued and Submitted June 9, 2011-Seattle, Washington

Before: Stephen Reinhardt, William A. Fletcher, and Johnnie B. Rawlinson, Circuit Judges.

Opinion by Judge William A. Fletcher

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 park- ing 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, ...


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