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GARPEG, LTD. v. UNITED STATES

March 23, 1984

Garpeg, Limited, Petitioner and the Chase Manhattan Bank, N.A., Intervenor
v.
United States of America, Respondent.



The opinion of the court was delivered by: SWEET

Opinion

SWEET, District Judge: This action arises out of an Internal Revenue Service ("IRS") investigation of Gucci Shops, Inc. ("Gucci Shops") and Aldo Gucci. On December 19, 1983, an administrtive summons was issued pursuant to sections 7602 and 7603 of the Internal Revenue Code of 1954 (the "Code"). On December 29, 1983, the summons was served on the Chase Manhattan Bank, N.A. ("Chase"). The summons requested production of documents and records at all Chase branches, including the branch in Hong Kong, pertaining to any accounts maintained by Garpeg, Limited ("Garpeg"), a Hong Kong corporation.

 On January 19, 1984, Garpeg commenced this action by filing a petition to quash the IRS summons. On January 30, 1984, Garpeg obtained an ex parte "Interim Injunction" from the Supreme Court of Hong Kong, enjoining Chase from producing any documents from its Hong Kong branch in response to the IRS summons. The Hong Kong court has scheduled a hearing to determine whether the injunction should become permanent.

 On February 6, 1984, Chase moved pursuant to 26 U.S.C. ยง 7609(b)(2)(C) and Fed. R. Civ. P. 24, to intervene as of right in this action, and for an order quashing the summons to the extent it requires production of documents maintained in the Hong Kong branch or, in the alternative, for a preliminary injunction pursuant to Fed. R. Civ. P. 65, requiring Garpeg (i) to discontinue all legal proceedings presently pending against Chase in the courts of Hong Kong, or (ii) to waive any and all rights to secrecy which it may possess by virtue of Hong Kong law with respect to the accounts maintained by Chase and to consent to the production of documents by Chase in response to the IRS summons. Chase's motion to intervene was granted orally by the court on March 5, 1984.

 On February 17, 1984, the Government moved to enforce the summons and, like Chase, sought a preliminary injunction to prevent Garpeg from continuing the Hong Kong proceedings or, in the alternative, to require Garpeg to waive its rights under Hong Kong law.

 For the following reasons, the government's motion to compel enforcement of the summons is granted to the extent that all records concerning any financial transactions between Garpeg and Gucci Shops or between Garpeg and Aldo Gucci, including any financial transactions between Garpeg and other parties which were authorized by Aldo Gucci as signatory must be produced. Accordingly, Garpeg's petition and Chase's motion to quash the summons are granted in part and denied in part. The motion for a preliminary injunction or for a compelled waiver of rights is denied.

 I. Garpeg's petition to quash the summons. The IRS may issue a summons for the examination of books, papers and records of third parties pursuant to Section 7602 of Title 26, United States Code. That section provides, in relevant part, as follows:

 For the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability, the Secretary or his delegate is authorized --

 (1) to examine any books, papers, records, or other data which may be relevant or material to such inquiry;

 (2) to summon . . . any person having possession, custody or care of books of account containing entries relating to the business of the person liable for tax or required to perform the act . . . to appear before the Secretary at a time and place named in the summons and to produce such books, papers, records, or other data, and to give such testimony, under oath, as may be relevant or material to such inquiry; and

 (3) to take such testimony of the person concerned, under oath, as may be relevant or material to such inquiry.

 "The summons power has consistently been interpreted as a broad mandate, designed to give the Service the "authority . . . necessary for the effective enforcement of the revenue laws." United States v. Arthur Young & Co., 677 F.2d 211, 218 (2d Cir. 1982) (quoting United States v. Euge, 444 U.S. 707, 715-16, 63 L. Ed. 2d 141, 100 S. Ct. 874 & n. 9 (1980)), cert. granted, 103 S. Ct. 1180 (1983).

 The basic criteria for judicial enforcement of an IRS summons are set forth in United States v. Powell, 379 U.S. 48, 57-58, 13 L. Ed. 2d 112, 85 S. Ct. 248 (1964). Powell requires that the Government make an initial showing

 that the investigation will be conducted pursuant to a legitimate purpose, that the inquiry may be relevant to the purpose, that the information sought is not already within the Commissioner's possession, and that the administrative steps required by the Code have been followed. . . .

 Garpeg contends that the IRS has failed to demonstrate that it has met the requirements for enforcement set forth in Powell. Garpeg contends that the summons seeks irrelevant information and is overboard and that the IRS has failed to comply with the notice provisions of section 7609(a)(1) of the Code. *fn1"

 Notice

 Section 7609(a)(1) of the Code provides in pertinent part:

 [N]otice of the summons shall be given to any person so identified [in the description of records to be produced contained in the summons] within 3 days of the day on which 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.

 Garpeg maintains that it has not received notice. However, in a supplemental affidavit, submitted by Special Agent Richard J. Collery of the Criminal Investigation Division of the IRS ("Collery"), the IRS has demonstrated that notice of the summons was sent to Garpeg, at two different addresses in Hong Kong, by registered mail on December 30, 1983. Two mailing receipts and an acknowledgement of receipt are attached to the Collery supplemental affidavit.

 Relevance and Overbreadth

 Under Section 7602 of the Code, the IRS may summon only those records that "may be relevant or material" to its inquiry. The test for relevance is whether the documents requested "might has thrown light upon" the correctness of a return. United States v. Arthur Young & Co., supra, 667 F.2d at 218; United States v. Noall, 587 F.2d 123, 125 (2d Cir. 1978), cert. denied, 441 U.S. 923, 60 L. Ed. 2d 396, 99 S. Ct. 2031 (1979); United States v. Shlom, 420 F.2d 263, 265 (2d Cir. 1969), cert. denied, 397 U.S. 1074, 25 L. Ed. 2d 809, 90 S. Ct. 1521 (1970); Foster v. United States, 265 F.2d 183, 187 (2d Cir.), cert. denied, 360 U.S. 912, 3 L. Ed. 2d 1261, 79 S. Ct. 1297 (1959).

 Garpeg contends that a somewhat higher threshold of relevance is required in this case because the summons is directed not to the taxpayer but to a third party.In United States v. Harrington, [68-1 USTC P9178], 388 F.2d 520, 523 (2d Cir. 1968), the Second Circuit noted that "judicial protection against the sweeping or irrelevant order is particularly appropriate in matters where the demand for records is directed not to the taxpayer but to a third-party who may have had some dealing with the person under investigation." In ...


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