The opinion of the court was delivered by: SWEET
This action is one of a series of related actions arising out of an Internal Revenue Service ("IRS") investigation of the tax liability of Dr. Aldo Gucci ("Gucci") and Gucci Shops, Inc. ("Gucci Shops") for the years 1979, 1980 and 1981. In connection with the investigation, the IRS issued a number of summonses to Chase Manhattan Bank, N.A. ("Chase") and Citibank, N.A. ("Citibank"), requesting production of financial records of Gucci, Gucci Shops and various third parties. Two summonses issued to Chase were enforced in prior actions, one by this court, Garpeg, Ltd. v. United States, 84 Civ. 437 (RWS), and one by the Honorable Gerard L. Goettel, United States v. Chase Manhattan Bank, N.A., M-18-304 (GLG). Both actions have been appealed, and the Government has recently moved to hold Chase in civil contempt for failure to comply with the summonses. In addition, three summonses issued to Citibank, as well as the summons issued to Chase which is the subject of this action, have been enforced by opinion and order of this date. See Garpeg, Ltd. v. United States, 83 Civ. 6885 (RWS); Garpeg, Ltd. v. United States, 84 Civ. 435 (RWS); Vanguard International Manufacturing, Inc. v. United States, 84 Civ. 436 (RWS).
Petitioner Vanguard International Manufacturing, Inc. ("Vanguard"), a Panamanian corporation, commenced this action on September 20, 1983 by filing a petition to quash an administrative summons issued by the IRS on August 22, 1983 to Chase pursuant to sections 7602 and 7609 of the Internal Revenue Code of 1954, 26 U.S.C. §§ 7602, 7609.The summons requested production of records located in "all branches of Chase Manhattan Bank including . . . Chase Manhattan Bank, Hong Kong," concerning, among other things, bank accounts "in the name of and/or under the signatory authority of Aldo Gucci for the period January 1, 1979 through December 31, 1981." The documents summoned were required to be produced in New York on September 21, 1983. Notice of the summons was mailed to authorized representatives of Cucci on August 24, 1983. Vanguard was not identified in the summons, and notice of the summons was not mailed or otherwise delivered to Vanguard.
Chase intervened in the action pursuant to 26 U.S.C. § 7609(b) and has moved to quash the summons to the extent it seeks production by Chase of documents subject to an order of the Supreme Court of Hong Kong enjoining Chase from producing such documents.Chase has moved, in the alternative, for a preliminary injunction pursuant to Fed.R.Civ.P. 65 requiring Vanguard (i) to take all steps in its power to have the Hong Kong order withdrawn or otherwise made ineffective and to discontinue all legal proceedings presently pending against Chase in the courts of Hong Kong or (ii) to waive all rights to secrecy of its bank records which it possesses by virture of Hong Kong law and to consent to Chase's production of documents pursuant to the IRS summons.
For the following reasons, Chase's motion is denied, the Government's motion to enforce the summons is granted, and the petition to quash the summons is dismissed.
Vanguard contends that the IRS failed to provide notice as required by 26 U.S.C. § 7609 because it did not give Vanguard's financial affairs. The Government contends that Vanguard was not entitled to notice of the summons because it was not identified in the summons. Vanguard also argues that the IRS has failed to demonstrate a sufficient nexus between Vanguard's records and Gucci, the subject of the IRS investigation. Finally, Vanguard contests enforcement of the summons because the matter has been referred to the Department of Justice for criminal prosecution.
Section 7609(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 7609(a), requires that notice of a summons served on a third-party recordkeeper,
such as Chase, which requires production of "any portion of records made or kept of the business transactions or affairs of any person (other than the person summoned) who is identified in the description of the records contained in the summons," must be given to the person so identified within three days of the day service is made but no later than twenty-three days before the records are to be examined. Any person who is entitled to notice under 26 U.S.C. § 7609(a) has the right to intervene in an enforcement proceeding, 26 U.S.C. § 7609(b)(1), or to bring a proceeding to quash the summons within twenty days after notice is given, 26 U.S.C. § 7609(b)(2)(A).
The IRS's authority to issue third-party summonses is very broad. See 26 U.S.C. § 7602; S.Rep.No. 938, 94th Cong., 2d Sess. 369-71, reprinted in 1974 U.S. Code Cong. & Ad. News 3796-3803. Section 7609 was enacted to provide limited protection against unreasonable infringements upon the civil rights of taxpayers through the IRS's use of third-party summonses. United States v. New York Telephone Co., 682 F.2d 313, 315-16 (2d Cir. 1982). The situation under prior law was described as follows:
The person to whom the records pertain may . . . have some protectable interest which could be asserted to bar enforcement of the summons. However, there is no legal requirement that the taxpayer (or other party) to whose business or transactions the summoned records relate be informed that a third-party summons has been served.
H.R.Rep. No. 658, 94th Cong., 1st Sess. 306-07, reprinted in 1974 U.S.Code Cong. & Ad. News 3202-03 (citation omitted); see S.Rep. No. 938, supra, at 368. In enacting section 7609, Congress concluded that "many of the problems in this area would be cured if the parties to whom the record pertain were advised of the service of a third-party summons and were afforded a reasonable and speedy means to challenge the summons where appropriate." H.R.Rep. No. 658, supra, at 307, 1974 U.S.Code Cong. & Ad. News at 3203; S.Rep. No. 938, supra, at 368, 1974 U.S. Code Cong. & Ad. News at 3798.
Vanguard argues persuasively that it is entitled to the procedural safeguards of section 7609 and, in particular, its notice provisions. If free to do so, the court would have followed the reasoning set forth in United States v. First Bank, Stand.Fed.Tax Rep. (CCH) P9269 (D. Conn. Sept. 27, 1983) (84-1 USTC Advance Sheets), which held that a co-owner of a joint bank account who is not identified in the summons is entitled to notice when an administrative summons is served on a third-party recordkeeper. Unfortunately for Vanguard, subsequent to the argument on this and related motions, the Court of Appeals reversed that decision, United States v. First Bank, 737 F.2d 269 (2d Cir. 1984), and adopted a literal interpretation of the language of section 7609, despite the broader Congressional intent expressed in the legislative history. The Court of Appeals concluded that "the plain meaning of § 7609(a) requires that notice be given only to the person or persons "identified" in the summons, and since [the taxpayer] was the only person identified therein, [the IRS] was not required to give notice to any co-owner of [the taxpayer's] account as a pre-condition to obtaining the records summoned." Id. at 7. The Court of Appeals further stated:
We recognize that our literal interpretation of § 7609(a)'s notice provision may lead to situations where in response to an IRS summons a third-party recordkeeper may well find itself disclosing records in which there is a joint owner and, unless the joint owner is identified in the summons, he will not be notified of the issuance of the summons. In our view, however, this possibility was not thought by Congress to create a sufficient infringement to warrant the inclusion of additional statutory notice requirements for unidentified persons. We believe this view to be reasonable.
Although the instant case involves a taxpayer with signatory authority over corporate bank accounts and the corporation, rather than co-owners of a joint bank account, the Court of Appeals' interpretation of section 7609 must be regarded as controlling. As a result, Vanguard, a foreign corporation who is not a target of an IRS investigation, is not entitled to notice of an administrative summons issued to a third-party recordkeeper which requests production of its financial records, and, more importantly, it is not ...