On March 29, the Supreme Court heard oral arguments in a case to resolve a circuit-level split over the scope of statutory language regarding when the IRS must give notice of third-party record summonses.
Background.
In Polselli v. IRS, (CA 6 2022, 129 AFTR 2d 2022-335), the Sixth Circuit upheld the U.S. District Court for the Eastern District of Michigan’s ruling that the IRS didn’t have to notify a wife and two law firms of the agency’s attempts to collect the husband’s unpaid taxes, which exceeded an aggregated total of $2 million after a decade of accumulation.
An IRS agent had feared that the delinquent taxpayer in question, Remo Polselli, was shielding assets using his wife Hanna’s bank account or through his limited liability company. Administrative summonses were issued to Wells Fargo, where Hanna was a customer, as well as J.P. Morgan Chase Bank and Bank of America, where two law firms used by Remo held accounts. Hanna and the firms—Abraham & Rose, PLC and Jerry R. Abraham, PC—learned of the summonses from the banks and took the IRS to court, eventually having their petition for certiorari granted by the Supreme Court in December after suffering losses at the circuit and district levels last year.
The petitioners have argued that the IRS was required to notify them under Code Sec. 7609 and that the IRS could not rely on the built in exception in Code Sec. 7609(c)(2)(D)(i), which provides that the IRS doesn’t need to give notice for summonses “issued in aid of the collection” of assessments or judgments. While the Sixth Circuit’s ruling joins precedent set by the Seventh Circuit, the Ninth Circuit previously held that the exception applies to summons on third-party recordkeepers only if the delinquent taxpayer owns or has a legal interest in the records sought by the IRS.
Oral arguments.
Petitioners were represented in oral arguments Wednesday by Shay Dvoretzky of Skadden, Arps, Slate, Meagher & Flom LLP. “The Sixth Circuit and IRS has interpretation is inconsistent with the statute’s text, context and purpose, and it would create the same opportunity for abuse the Congress sought to eradicate,” said Dvoretzky in his opening statement. “The question isn’t whether the IRS can summon the records it needs, only whether it can do so secretly and without judicial oversight. The IRS says ‘trust us, we police ourselves,’ but Congress repudiated that approach when it enacted Section 7609’s privacy protections for innocent third parties.”
Dvoretzky proceeded to argue that Congress did not intend to create an exception that would essentially allow the IRS to have a total mandate in deciding when summonses are issued in aid of collection efforts, or one that “expands so far as to effectively swallow the rule.”
Justice Elana Kagan countered that Congress employs so-called belt and suspenders approaches “all the time” when drafting legislative language and that here, Code Sec. 7609 was “written in recognition of the fact that there are two sources of money that the IRS can try to collect from,” those being individual taxpayers and fiduciaries or transferees. Kagan said her interpretation was that as long as it is in aid of collection, there does not need to be a notice regardless of which of the two sources—or “pots”—the IRS goes to.
Dvoretzky responded that the “much more plausible inference in this context” is that Congress intended to carefully craft an exception that would not violate privacy protections.
The IRS was represented by Ephraim McDowell, assistant to the solicitor general in the Department of Justice. McDowell argued that a ruling in favor of the petitioners would “disturb the balance that Congress struck by inserting two artificial limitations into the statute, namely a direct connection requirement that supposedly leads into illegal interest tests,” adding that these tests “lack any established legal meaning,” therefore “their boundaries are amorphous.”
He clarified to Chief Justice John Roberts and Justice Neil Gorsuch that the IRS does not believe the exception is “limitless,” and that there needs to be “some connection” to the delinquent taxpayer and their assets to proceed without notice. Put another way, it can’t be a “shot in the dark,” as McDowell described.
Responding to Roberts’ question if the IRS would “normally assume that financial records of a husband and wife are intertwined,” McDowell emphasized that in this case, there was “other evidence of extensive financial dealings” surrounding Hanna’s account and Remo’s business activities, and that her account wasn’t examined simply because they happened to be married.
For more information about the IRS’s third-party summons procedure, see Checkpoint’s Federal Tax Update ¶T-1251.
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