Procedure & Administration
The IRS issued four summonses to banks in Oklahoma for records involving nursing homes owned by Sam Jewell. Under Sec. 7609, the IRS was required to notify Jewell at least 23 days before the examination date. However, he received the notices less than 23 days before the examination date. Alleging inadequate notice, Jewell filed petitions to quash the summonses in the eastern and western federal district courts in Oklahoma.
The two courts split on how to interpret the notice requirement. The western district court granted the government's summary judgment motion and denied Jewell's petition to quash, noting that he received the summonses in time to file his petition. The eastern district court granted Jewell's petition to quash and denied the government's motion to dismiss, reasoning that the IRS failed to comply with the notice requirement. Jewell appealed the ruling of the western district court, and the IRS appealed the ruling in the eastern district court.
In Powell , 379 U.S. 48 (1964), the Supreme Court listed four requirements for the IRS to make a prima facie case for enforcement of an administrative summons:
- The investigation in which the summons is issued must be conducted for a legitimate purpose;
- The summons must be relevant to that purpose;
- The IRS must not already have the information sought by the summons; and
- The IRS must have followed the administrative steps required by the Code for the summons.
Jewell and the IRS agreed in this case that only the fourth prong of the test was at issue.
Sec. 7609 contains the administrative procedures for the IRS to issue summonses to third parties. It requires that:
notice of the summons shall be given to any person so identified within 3 days of the day on which such 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.
The IRS admitted that Jewell had not received the required statutory notice of the summons.
The Tenth Circuit's Decision
The Tenth Circuit found that the 23-day notice requirement was an administrative step and that the IRS had failed to meet the Powell requirements to establish a prima facie case for enforcement of the summons. Splitting with other circuit courts that have addressed the issue, the court held that because the IRS failed to meet the Powell requirements, the court could not enforce the summons.
The IRS first argued that despite the use of the word "shall" in Sec. 7609, it was not mandatory for the IRS to give a taxpayer 23 days' notice of the summons. In support of its position, it pointed to two Supreme Court cases, Barnhart v. Peabody Coal Co. , 537 U.S. 149 (2003) , and Dolan , 560 U.S. 605 (2010), in which the Court found that the government was required to take a certain action, even though the deadline by which it was statutorily required to take the action had already passed. Based on this finding, the IRS argued that the word "shall" did not always signify a mandatory intent.
The Tenth Circuit, however, differentiated between Sec. 7609 and the statutes at issue in Barnhart and Dolan . Under Sec. 7609, the IRS could, but was not required to, issue a summons. In Barnhart and Dolan , on the other hand, the government did not have a choice of performing the specified action. Therefore, these cases had no bearing on the meaning of "shall" in the context of Sec. 7609.
The IRS also argued that the 23-day notice requirement was not an administrative step. The court, reviewing a dictionary definition of "administrative," found that the term was broad and could include the notice requirement and noted that it had previously found the notification requirements of Sec. 7609(a)(1) were administrative steps. Therefore, the court found that the 23-day notice requirement was an administrative step.
Having found that the notice requirement was mandatory and was an administrative step and that the IRS had not met the requirement, the court found that under Powell , the IRS had failed to make a prima facie case for enforcing the summons. Thus, Powell prevented the enforcement of the summons. The court noted, however, that other circuits had interpreted Powell differently and held that a failure to meet the Powell requirements did not mean that a court was barred from enforcing a summons. However, the Tenth Circuit averred that the Supreme Court had spoken clearly in Powell , and it was obliged to follow the precedent from that case.
A dissenting opinion in the case agreed that the IRS had a mandatory duty under Sec. 7609(a) and that the Powell test governed whether the IRS had made a prima facie showing that a court should enforce a summons. However, the dissent did not believe that a technical breach of an administrative provision of the Code should result in an automatic bar on the enforcement of a summons. Rather, as several other circuits have, the dissent advocated taking the approach of considering whether, under the totality of the circumstances, the court should enforce the summons.
As the dissent notes, Sec. 7609 does not specify what the penalty should be if the IRS does not meet the 23-day notice requirement, so it seems a bit severe to mandate that the penalty should be an automatic bar to the enforcement of the summons, even in cases where the recipient of the summons was not prejudiced by the IRS's failure to meet the requirement. Nonetheless, it is somewhat vexing that the IRS argued this point, given that it rarely takes a "no harm, no foul" approach when a taxpayer fails to meet an administrative requirement.
Jewell , No. 13-06069 (10th Cir. 4/28/14)