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 P.C.

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 Circuit, however, rejected the Ninth Circuit’s legal-interest test, concluding that it was contrary to the plain language of Sec. 7609(c)(2)(D)(i), and held that as long as the third-party summons is issued to aid in the collection of any assessed tax liability, the notice exception applies (Polselli, 23 F.4th 616 (6th Cir. 2022)).

The petitioners appealed the Sixth Circuit’s decision to the Supreme Court. The Supreme Court agreed to hear the case to resolve the split between the Sixth and Ninth circuits. Specifically, the question taken up by the Court was whether the exception to the notice requirement in Sec. 7609(c)(2)(D)(i) applies only where a delinquent taxpayer has a legal interest in accounts or records summoned by the IRS under Sec. 7602(a).

The Supreme Court’s decision

The Supreme Court held that under a straightforward reading of the statutory text, the exception to the notice requirement for a summons issued by the IRS is not limited to situations where a delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS.

The Supreme Court stated that three conditions in Sec. 7609(c)(2)(D) must be met to exempt the IRS from providing notice of a summons in circumstances like those of the petitioners. First, a summons must be issued in aid of collection. Second, it must aid the collection of an assessment made or judgment rendered. Third, it must aid the collection of assessments or judgments against the person with respect to whose liability the summons is issued. The Court stated that “[n]one of the three components for excusing notice in §7609(c)(2)(D) (i) mentions a taxpayer’s legal interest in records sought by the IRS, much less requires that a taxpayer maintain such an interest for the exception to apply.” Therefore, based on a straightforward reading of the statutory text, the Court held that the notice exception did not contain a legal-interest limitation.

Moreover, the Court found that had Congress wanted to include a legalinterest requirement, it knew how to do so. According to the Court, Congress had demonstrated this knowledge in Sec. 7610, a statute adjacent to Sec. 7609 and enacted as part of the same act as Sec. 7609. In Sec. 7610(b)(1), Congress included a requirement of a proprietary interest in the records summoned in that provision’s exception to the requirement for reimbursement of costs of producing records in response to a summons.

Quoting Sebelius v. Cloer, 569 U.S. 369, 378 (2013) (internal quotation marks omitted), the Court noted that it assumes that Congress “acts intentionally and purposely” when it “includes particular language in one section of a statute but omits it in another section of the same Act.” Therefore, the existence of the “proprietary interest” requirement in the exception to the reimbursement of costs requirement in Sec. 7610(b)(1) “strongly” suggested to the Court that Congress deliberately omitted a similar requirement from the notice exception in Sec. 7609(c)(2)(D)(i).

The petitioners put forth two arguments regarding why the Court should adopt the legal-interest requirement, but the Court rejected both. First, the petitioners argued that the phrase “in aid of the collection” should be interpreted narrowly to mean only inquiries that “directly advance” the IRS’s collection efforts and that a summons will only directly advance the IRS’s collection efforts if it is targeted at an account containing assets that the IRS can collect to satisfy the taxpayer’s liability. According to the petitioners, this makes the legal-interest requirement necessary for the exception because the only way that a summons issued to a third party will produce collectible assets is if the delinquent taxpayer has a legal interest in the targeted account.

The Court found that this argument did not give a fair reading to the phrase “in aid of collection.” Under their interpretation, the petitioners would have the Court read the phrase to require that a summons produce collectible assets, but, as the Court noted, the petitioners had stated in their brief that “aid” means “to help” or “assist.” Even if a summons may not itself reveal taxpayer assets that can be collected, it may nonetheless help the IRS find such assets. The Court concluded that the petitioners were conflating activities that help advance a goal with activities sure to accomplish it, thereby ignoring the typical meaning of “in aid of.”

The petitioners also argued that the exception provided in Sec. 7609(c)(2) (D)(i) must be read narrowly to avoid making the exception in Sec. 7609(c) (2)(D)(ii) superfluous. The petitioners reasoned that reading Sec. 7609(c)(2) (D)(i) to exempt from notice every summons that helps the IRS collect an “assessment” against a delinquent taxpayer would leave Sec. 7609(c)(2)(D) (ii) with no work to do.

The Court found this argument overlooked that Sec. 7609(c)(2)(D)(i) and Sec. 7609(c)(2)(D)(ii) apply in different circumstances. First, Sec. 7609(c) (2)(D)(i) applies upon an assessment by the IRS, and Sec. 7609(c)(2)(D)(ii) applies upon the finding of a liability by the IRS, which occurs before an assessment of what a taxpayer owes. Second, the two clauses are addressed to different entities. Sec. 7609(c)(2)(D) (i) applies to assessments or judgments against a taxpayer, who is the person with respect to whose liability the summons is issued. Sec. 7609(c)(2)(D)(ii), in contrast, concerns the liability of a transferee or fiduciary.

The Court explained that these distinctions were not academic and that they showed that the second notice exception found in Sec. 7609(c)(2)(D) (ii) applies in situations where Sec. 7609(c)(2)(D)(i) may not. Sec. 7609(c) (2)(D)(ii) permits the IRS to issue unnoticed summonses to aid its collection from transferees or fiduciaries before it makes an official recording of a taxpayer’s liability. The Court also pointed out that in certain circumstances in bankruptcy, the IRS may not be able to collect an assessment or judgment rendered against a taxpayer, and thus Sec. 7609(c)(2)(D)(i) cannot apply, as a summons cannot be issued in aid of “an impossible collection effort.” However, in this situation, Sec. 7609(c)(2)(D) (ii) may still permit the IRS to issue a summons without notice to collect the liability of the taxpayer’s transferee or fiduciary.

Reflections

The Court acknowledged in its opinion that if there were no limits on the exception to notice, the IRS might use it to abuse its summons authority. The IRS agreed, conceding that the phrase “in aid of the collection” was not limitless, and a summons should only be considered to be issued “in aid of the collection” if it is “reasonably calculated to assisting in collection.” The Court, however, did not decide what limits the phrase “in aid of the collection” placed on the exception, as the only question before it was whether the exception provided in Sec. 7609(c)(2)(D)(i) requires that a taxpayer maintain a legal interest in records summoned by the IRS.

Polselli, No. 21-1599 (U.S. 5/18/23)

Contributor

James A. Beavers, CPA, CGMA, J.D., LL.M., is The Tax Adviser’s tax technical content manager. For more information about this column, contact thetaxadviser@aicpa.org.