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UNITED STATES v. CHASE MANHATTAN BANK

March 27, 1984

THE UNITED STATES OF AMERICA, et al., Petitioners, against THE CHASE MANHATTAN BANK, N.A., et al., Respondents.


The opinion of the court was delivered by: GOETTEL

GOETTEL, D.J.:

Before the Court is a petition to enforce a summons issued by the Internal Revenue Service ("the IRS"), by which it seeks to obtain the banking records of F.D.C. Co., Ltd. ("FDC"), a Hong Kong corporation, that are now in the custody and control of a Hong Kong branch of Chase Manhattan Bank, N.A. ("Chase"). The IRS seeks the records in connection with its investigation of Aldo Gucci and Gucci Shops, Inc. (hereinafter referred to as either "Gucci," "Gucci Shops," or "the taxpayers"). The Government also seeks an order directing FDC to withdraw an action now pending before the Supreme Court of Hong Kong, in which FDC seeks to make permanent an interim order enjoining Chase from complying with the IRS summons. Finally, the IRS seeks an order from this Court directing FDC to waive its right of secrecy under Hong Kong law.

 Defendants Chase and FDC respond to this petition in very different ways. Chase moves to quash the summons, claiming that an order compelling it to produce FDC's records would force Chase to choose between violating an order of this Court or violating the order of the Hong Kong court, as well as Hong Kong's bank secrecy law. In the alternative, Chase seeks an order directing FDC to withdraw its Hong Kong action and to waive its rights under Hong Kong law to have the secrecy of its banking records preserved. FDC responds by claiming that this Court lacks personal jurisdiction over it because FDC is not present in the United States, does no business here, and has no officers or directors here. FDC further asserts that this Court lacks jurisdiction to order FDC to withdraw its Hong Kong action or to waive its rights to preserve the secrecy of its banking records, and also that FDC was not properly served with process. For all of these reasons, FDC moves for dismissal of the claims against it.

 Obviously, these motions pose difficult questions of jurisdiction and international law that go far beyond the issues normally posed in summons enforcement actions. The Court, however, finds it unnecessary to reach all of the questions presented by the parties to this complex proceeding. For the present, the Court need only consider the IRS's motion to enforce its summons and Chase's cross-motion to quash. *fn1" Decision is reserved, therefore, on FDC's motion to dismiss, and on the motions by the Government and Chase to direct FDC to withdraw its Hong Kong court actions and to waive its bank secrecy rights.

 For the reasons discussed below, the Court grants the Government's motion to enforce the summons issued to Chase and denies Chase's motion to quash.

 BACKGROUND

 The summons at issue was served on Chase on December 29, 1983, in connection with an investigation into the tax liabilities of taxpayers Gucci and Gucci Shops for the 1979, 1980, and 1981 tax years. The investigation was jointly undertaken by the Criminal Investigation Division and Examination Division of the IRS to examine all sources of income properly attributable to the taxpayers, as well as to investigate all expenses deductible from their income. The purpose of the investigation was to evaluate the validity of their tax returns.

 According to the affidavit of IRS Special Agent Richard J. Collery ("Collery"), submitted by the Government, there was an unusually close relationship between the taxpayers and FDC. Indeed, according to Exhibit A to Collery's affidavit, it appears that FDC may very well have been created as a corporate front to collect income that was properly attributable to the taxpayers and to "manufacture" expenses that the taxpayers could charge against their income. *fn2" Furthermore, Exhibit B to Collery's affidavit provides additional evidence of the unusually close relationship between the taxpayers and FDC. The exhibit consists of two letters. The first, on Gucci Shops letterhead, from Gucci to Cyril Magnin, chairman of Joseph Magnin, a department store, granted Magnin a franchise to operate Gucci shops. The letter, ironically dated April 15, 1978, and signed by both men, contains a detailed description of the agreement and required Gucci Shops personnel to visit the Magnin-operated Gucci shops to advise Magnin on their operations. The second letter, also dated April 15, is addressed only to "F.D.C. Company," is on non-letterhead stationary, and is signed only by Cyril Magnin. By this letter, Joseph Magnin agreed to pay FDC a royalty of ten percent of the value of all merchandise purchased by Magnin from Gucci. In return, FDC was to serve as fashion design consultant for a period of ten years. This second letter contains no details, does not specify what services, if any, FDC was to provide, or how they would be provided. In addition, there is no evidence that FDC actually had a staff that could provide any consulting services. Finally, the Magnin letter provides that payments to FDC were to be made monthly by mail to FDC's post office box in New Jersey, not to its Hong Kong address.

 The allegations that FDC served as a conduit for income that was properly attributable to the taxpayers *fn3" is bolstered by a supplemental affidavit executed by Collery. In this supplemental affidavit, Collery asserts that:

 (1) during each of the three years under investigation, payments of nearly $1 million per year were made to FDC by Gucci franchisees, *fn4" and FDC collected from Gucci Shops itself approximately $250,000 during 1978 and 1979 for fashion consulting services;

 (2) papers opening FDC's account with Chase in Hong Kong in 1975 listed as directors and authorized signatories Edward Stern ("Stern"), accountant for Gucci Shops, Marie Savarine ("Savarine"), treasurer and president of Gucci Shops, and Kerry Obonai ("Obonai"), FDC's managing director in Hong Kong;

 (3) both Stern and Savarine occupied offices at Gucci Shops' New York ofice;

 (4) Savarine listed herself as secretary of FDC on the application for the New Jersey post office box at which FDC received checks from Gucci Shops' franchisees, and after the post office box was closed in 1982, mail addressed to it was forwarded to Savarine's residence;

 (5) under Savarine's direction, a bookkeeper at Gucci Shops' New York office prepared bills on FDC letterhead for the ten percent "consulting fees" due FDC under the agreement between Gucci Shops and its franchisees, and that these bills were mailed to the franchisees from New York;

 (6) on several occasions, various franchisees mailed checks for the amounts due FDC to Savarine personally at Gucci's New York offices, and on at least one occasion, Savarine, acting as president of Gucci Shops, transmitted one such check to Obonai in Hong Kong with directions to deposit the check in FDC's account at Chase and to return a copy of the deposit ticket to New York; and

 (7) in November 1978, a check for more than $250,000 from Gucci Shops to FDC, for consulting services rendered in the year ended August 31, 1978, was negotiated at Chase's ...


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