Analysis of and reflections on recent cases and rulings.

• Author: Beavers, James A.

Procedure & Administration

Supreme Court rejects challenge to notice exception for IRS summonses

The Sec. 7609(c)(2)(D)(i) exception to the notice requirement for a summons issued by the IRS under Sec. 7602(a) applies whether or not a delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS.

The IRS summons power

The IRS may issue summonses in its pursuit of unpaid taxes and the taxpayers who owe them. Under Sec. 7602(a), the IRS may issue a summons to "determin[e] the liability" of a taxpayer or "any transferee or fiduciary" for unpaid taxes or to "collec[t] any such liability." A summons under Sec. 7602(a) can be issued to a third party other than the taxpayer under investigation, requesting the third party to produce "books, papers, records, or other data" concerning the taxpayer under investigation.

Because of the IRS's broad power to issue summonses, to protect their subjects, Sec. 7609(a)(1) requires the IRS to give notice that a summons has been issued to any person identified in the summons. Further, Sec. 7609(b)(2) (A) allows anyone entitled to notice of a summons to bring a motion to quash the summons. Sec. 7609(h)(1) gives federal district courts "jurisdiction to hear and determine any proceeding" about a motion to quash, thereby waiving the sovereign immunity of the United States.

The notice requirement is not absolute, and certain exceptions apply to it. Relevant to this case, under Sec. 7609(c)(2)(D)(i), an exception is provided to notice for a person who is identified in the summons if it is issued in aid of the collection of an assessment made or judgment rendered against the person with respect to whose liability the summons is issued. Likewise, under Sec. 7609(c)(2)(D)(ii), notice is not required to be given to a person who is identified in the summons if it is issued in aid of the collection of the liability at law or in equity of any transferee or fiduciary of a person referred to in Sec. 7609(c)(2)(D)(i).

Thus, the IRS may issue summonses both to determine whether a taxpayer owes a liability and to collect any outstanding taxpayer liability. When the Service conducts an investigation for the purpose of "determining the liability" of a taxpayer under Sec. 7602(a), it must provide notice of the summons to the parties identified in the summons, but when the IRS is collecting a taxpayer's liability, an activity distinct from determining the liability, notice of the summons to the identified parties may not be required under Sec. 7609(c)(2)(D).

Background

Between 2005 and 2017, Remo Polselli underpaid his federal taxes. After auditing Polselli, the IRS assessed him more than $2 million in unpaid taxes and penalties. Revenue Officer Michael Bryant was assigned to collect the assessments from Polselli.

Bryant believed that Polselli had concealed assets that could be used to pay the assessments, and as part of his search for those assets he issued summonses under Sec. 7602 to three banks. One was to Wells Fargo, requesting the financial records of Polselli's wife, Hanna Karcho Polselli, and Dolce Hotel Management LLC, an entity the funds of which Bryant believed Polselli controlled. He also issued summonses to JP Morgan Chase and Bank of America, seeking, among other things, copies of all bank statements relating to Polselli; his longtime law firm, Abraham & Rose PLC; and Jerry R. Abraham PC.

Bryant did not provide notice to any of these third parties named in the three summonses. Upon hearing about the summonses from the banks, Hanna Karcho Polselli, Jerry R. Abraham, and Abraham & Rose (the petitioners) all filed motions to quash the summonses in district court.

The district court did not go along, holding that under Sec. 7609(c)(2)(D) (i), Bryant was not required to give the petitioners notice. It found that Bryant's purpose for his investigation was to locate assets to satisfy Polselli's assessed liability and that the IRS had properly issued the summonses to aid in the collection of the liabilities. Thus, under Sec. 7609(c)(2)(D)(ii), Bryant was not required to give the petitioners notice, and, accordingly, the court held that there was no waiver of sovereign immunity by the United States, so it did not have jurisdiction over the petitioners' motions to quash the summonses {Polselli, No. 19-10956 (E.D. Mich. 11/16/20)).

The Sixth Circuit affirmed the district court, finding that the exception to notice in Sec. 7609(c)(2)(D)(i) applied. The petitioners had argued on appeal that for this exception to notice to apply, a taxpayer must have some legal interest or title in the object of the summons. This rule had been adopted by the Ninth Circuit in Ip, 205 F.3d 1168, 1175 (9th Cir. 2000). The Sixth...