Opinion
Civil No. 03-00589 HG-LEK.
April 19, 2004
The instant case involves an Internal Revenue Service ("IRS") summons issued in the course of the tax examination of Kayak Kauai, a Hawaii limited partnership. The summons, issued to and served on the Bank of Hawaii, sought records related to the Bank of Hawaii account held by Petitioner Asia Pacific Mutual Insurance Company, Ltd. ("Asia Pacific").
On October 28, 2003, Asia Pacific filed a Petition to Quash the Summons, contending that the summons was overbroad and sought irrelevant documents. On October 29, 2003, Kayak Kauai filed a Joinder in Asia Pacific's Petition. On January 15, 2004, the United States filed a Response and Objection to Petition to Quash Summons. On January 22, 2004, Asia Pacific filed a Reply Memorandum, and on January 28, 2004, Kayak Kauai filed a Memorandum in Support of Asia Pacific's Reply Memorandum.
On February 2, 2004, Magistrate Judge Kobayashi held a hearing on Asia Pacific's petition to quash the summons. By minute order on February 3, 2004, the Magistrate Judge found that, except as to one paragraph, the summons met the requirements established inUnited States v. Powell, 379 U.S. 48 (1964), and denied the petition to quash the summons at issue except as to said paragraph.
On February 12, 2004, the United States filed Objections to Magistrate Judge's Holding. Neither Asia Pacific nor Kayak Kauai filed an objection.
Having considered the papers submitted, the record in this case, and the applicable law, the Court SUSTAINS the United States' objections and, treating the Magistrate Judge's minute order as proposed findings and recommendations, ADOPTS them as modified, and DENIES Petitioner Asia Pacific's Petition to Quash the Summons, joined by Taxpayer Kayak Kauai.
Where the Magistrate Judge, designated to hear proceedings relating to the enforcement or quashing of an agency subpoena, improperly have characterized their findings and recommendations as a final order, the Court will treat the Magistrate Judge's findings and conclusions as proposed, rather than final. See, e.g., United States v. Mueller, 930 F.2d 10, 12 (8th Cir. 1991); United States v. First National Bank of Atlanta, 628 F.2d 871, 873 (5th Cir. 1980).
STANDARD OF REVIEW
With respect to motions to enforce, modify, or quash an IRS summons issued pursuant to 26 U.S.C. § 7602, magistrate judges may not issue final orders. See 26 U.S.C. § 7402(b); see also United States v. First National Bank of Atlanta, 628 F.2d 871, 873 (5th Cir. 1980). The district court may, however, refer the matter to a magistrate judge to conduct an evidentiary hearing and submit proposed findings of fact and a recommended disposition. See 28 U.S.C. § 636(b)(1).
If a party to the proceedings objects to the magistrate judge's findings or recommendations, the district court must review de novo those portions to which objection is made. See United States v. Raddatz, 447 U.S. 667, 673 (1980); Fed.R.Civ.P. 72(b). The district court may accept, reject, or modify, in whole or in part, the findings and recommendations made by the magistrate judge. Raddatz, 447 U.S. at 673-74.
De novo review means the district court must consider the matter anew, as if it had not been heard before and as if no decision previously had been rendered. See Ness v. Commissioner, 954 F.2d 1495, 1497 (9th Cir. 1992). The district court must arrive at its own independent conclusion about those portions to which objections are made, but a de novo hearing is not required. United States v. Remsing, 874 F.2d 614, 617-18 (9th Cir. 1989).
ANALYSIS
In order to obtain enforcement of a summons, the Internal Revenue Service must first establish its "good faith" by showing that the summons: (1) is issued for a legitimate purpose; (2) seeks information relevant to that purpose; (3) seeks information not already within the IRS' possession; and (4) satisfies all administrative steps required by the United States Code. United States v. Powell, 379 U.S. 48, 57-58 (1964). The government's burden is "a slight one" and typically is satisfied by the introduction of the sworn declaration of the revenue agent who issued the summons establishing that the Powell requirements have been met. Fortney v. United States, 59 F.3d 117, 120 (9th Cir. 1995). Once a prima facie case is made, a "heavy" burden is placed on the taxpayer to show an abuse of process or lack of good faith. United States v. Dynavac, Inc., 6 F.3d 1407, 1414 (9th Cir. 1993).
The IRS has established that the summons in question meets the four requirements set forth in Powell. First, the declaration submitted by the investigating IRS agent established that the summons was issued for a legitimate purpose — namely, as part of the IRS's tax examination. See 26 U.S.C. § 7602(b). Second, the Court is satisfied that the information sought through the summons is relevant to the tax examination, especially as the transactions occurring through Petitioner's bank account could help the IRS determine the ownership of Kayak Kauai and the validity of certain insurance expense deductions that Kayak Kauai reported on its returns. Third, the IRS agent's declaration affirmatively establishes that the summons requests documents not already within the IRS's possession. Lastly, the Court finds that all administrative requirements have been met with regard to the summons.
The United States objects to the Magistrate Judge's recommendation that, in the interest of the privacy rights of other entities doing business with Asia Pacific, paragraph 1(o) of the summons should be stricken. The Court agrees with the United States that, while paragraph 1(o) seeks a wide variety of records, it does not violate the privacy rights of others.
Paragraph 1(o) of the summons seeks the following bank records: "Memorandum files maintained by the bank or any of their officers or employees, reflecting communications between the [Bank of Hawaii] and Asia Pacific Mutual Insurance Co, Ltd., or others acting on their behalf, and documenting actions taken pursuant to directions received from Asia Pacific Mutual Insurance Co., Ltd., or on their behalf; and reflecting any thoughts or decisions of any persons regarding the account."
In United States v. Miller, 425 U.S. 435 (1976), the United States Supreme Court held that the subpoena of bank records constitutes "no intrusion into any area in which . . . a protected Fourth Amendment interest" exists, id. at 440, and that a bank customer has "no legitimate `expectation of privacy' in [the] contents" of bank records, id. at 442.
In response to the broad sweep of Miller, Congress enacted the Right to Financial Privacy Act ("RFPA"), 12 U.S.C. § 3401 et seq. The RFPA prohibits financial institutions from supplying the government with information about their customers' financial records unless the customer authorizes the disclosure of such information or the government obtains a valid subpoena or warrant. See 12 U.S.C. § 3402.
The RFPA does not, however, affect the holding in Miller as it pertains to an IRS summons. The RFPA specifically provides that "[n]othing in this chapter prohibits the disclosure of financial records in accordance with procedures authorized by Title 26." 12 U.S.C. § 3413(c). The Ninth Circuit has interpreted this provision to mean that IRS summonses are exempt from the RFPA's dictates. See Lidas, Inc. v. United States, 238 F.3d 1076, 1083 (9th Cir. 2001) (citations omitted).
As the United States has shown that the summons meets the four requirements set forth in Powell, and does not impinge on the privacy rights of other bank customers, the Court finds that the summons should be enforced in its entirety.
CONCLUSION
In accordance with the foregoing, it is HEREBY ORDERED that:
(1) the United States' Objection to Magistrate Judge's Holding is SUSTAINED; and
(2) Petitioner Asia Pacific's Petition to Quash the Summons, joined by Kayak Kauai, is DENIED.
IT IS SO ORDERED.