Appeals from the United States District Court for the Northern District of California. D.C. No. CV-93-20891-JW. D.C. No. CV-93-20892-JW. James Ware, District Judge, Presiding.
Before: Alex Kozinski and Michael Daly Hawkins, Circuit Judges, and Roslyn O. Silver,*fn* District Judge. Opinion by Judge Silver.
The Kaos are taxpayers who are being civilly investigated by the Internal Revenue Service ("IRS"). They appeal a consolidated district court order enforcing four summons served by the IRS and compelling the Kaos to execute consent directives. We conclude that 26 U.S.C. § 7602 does not authorize the IRS to compel taxpayers to sign consent directives which would enable the IRS to obtain records from third parties through means other than those established in 26 U.S.C. § 7609. Therefore, we reverse the district court's order.
In December, 1991, agent Jimmy Chan began conducting a tax investigation of Kolyn Enterprises Corporation (Kolyn), shareholder Dr. Cheng Kao, and his wife Susan Kao. Agent Chan was attempting to determine the Kaos' tax liability for the years 1988 through 1990, along with any violations of the internal revenue laws.
Chan's investigation allegedly revealed that Kolyn's net bank deposits exceeded the gross income reported on its tax returns by a total of $6,777,319 for the years 1988-1991. Most of the deposits were overseas wire transfers from offshore banks, recorded in the Kolyn account as loans and capital contributions from shareholders. The audit purportedly indicates that Dr. Kao and his father, Chin Wu Kao, sent several of the overseas wire transfers to Kolyn. According to Chan, Dr. Kao provided several different explanations of the source of those funds. Agent Chan claims that he requested documents that would substantiate the nature of the wire transfers but Kao and Kolyn failed to provide them.
Acting pursuant to 26 U.S.C. § 7602, on January 4, 1993, Agent Chan served summons on Dr. Kao and Susan Kao, and on Dr. Kao's parents, Chin Wu Kao and Su-Chin Kao, ordering each person to appear and sign an attached consent directive. The identical directives direct "any bank, financial institution, trust company, foundation, or management company . . . to disclose all information and deliver [to the IRS] copies of all documents of every nature" related to an account or trust of the signatory. The trust directive states that it provides "irrevocable authority." It has no expiration date. Neither does it limit the years for which information may be sought or limit the jurisdictions or institutions to which it applies.
The Kaos refused to sign the consent directives. Thereafter, the United States brought suit to enforce the summons. On March 8, 1994, the district court entered a consolidated order enforcing the summons and compelling the taxpayers to execute the directives.*fn1 The district court concluded that the consent directives did not violate the third-party summons procedure set forth in 26 U.S.C. § 7609. The Kaos appeal the district court's order.
26 U.S.C. § 7602(a)(2) authorizes the IRS to summon a taxpayer "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." The only issue on appeal*fn2 is one of statutory interpretation. We must determine whether 26 U.S.C. § 7602 provides the IRS with the authority to require taxpayers to execute consent directives authorizing third-party financial institutions to provide the IRS with documents pertaining to taxpayer accounts.
We construe § 7602 with the goal of ascertaining Congressional intent. F.D.I.C. v. McSweeney, 976 F.2d 532, 537 (9th Cir. 1992), cert. denied, 508 U.S. 950, 113 S. Ct. 2440, 124 L. Ed. 2d 658 (1993). In doing so, we must consider the Internal Revenue Code as a whole, interpreting § 7602 in a manner that does not render other portions of the Code meaningless or superfluous. See Boise Cascade Corp. v. E.P.A., 942 F.2d 1427, 1432 (9th Cir. 1991). To determine whether, pursuant to § 7602, the IRS can compel taxpayers to sign consent directives designed to access third-party records, we must interpret § 7602 in light of the specific procedures for obtaining third-party records set forth in 26 U.S.C. § 7609.
In § 7609, Congress established several special procedures the IRS must follow to summon a third-party recordkeeper. These procedures are designed to provide limited protection to a taxpayer under investigation by the IRS. When the IRS serves a summons on a third-party record keeper, the taxpayer must be given notice. 26 U.S.C. § 7609(a).*fn3 The taxpayer has the right to intervene in any proceeding involving enforcement of the summons. 26 U.S.C. § 7609(b)(1). The taxpayer also has the option to begin a proceeding to quash the summons. 26 U.S.C. § 7609(b)(2)(A). The taxpayer can challenge the summons in a number of ways, including: the documents the IRS seeks are irrelevant to the investigation, United States v. Goldman, 637 F.2d 664, 666-68 (9th Cir. 1980); or, the summons has been issued in violation of 26 U.S.C. § 7602(c)(1), after the IRS has recommended to the Department of Justice that the taxpayer be prosecuted for criminal tax violations.
In passing § 7609, Congress was strongly influenced by concern for taxpayers' civil rights, including the right to privacy. Prior to passage of § 7609, the IRS had authority to summon third parties to obtain taxpayers' records without notifying the taxpayer. Although the IRS had implemented some safeguards, the Congress was concerned that taxpayers' privacy rights were not adequately protected. Both the House and Senate reports state:
The committee believes that many of the problems in this area would be cured if the parties to whom the records 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. While the third-party witness also has this right of challenge, even under present law, the interest of the third-party witness in protecting the privacy of the records in question is frequently far less intense than that of the person to whom the records pertain.
H.R. Rep. No. 658, 94th Cong., 2d Sess., at 307 (1975), reprinted in, 1976 U.S.C.C.A.N. 2897, 3203; S. Rep. No. 938, part 1, 94th Cong., 2d Sess., at 368-69 (1976); ...