I. INTRODUCTION
Section 7602 of the Internal Revenue Code (I.R.C.)(26 U.S.C.)
authorizes the IRS to "examine any books, paper, records or other
data" that may be relevant to determine or collect the amount of
tax, penalties, and interest owed to the Government by any
taxpayer. In the vast majority of investigations, the taxpayer
or third party voluntarily produces information to the IRS. This
may come in response to an IRS form known as an Information
Document Request (IDR), a letter from the Service, or just in the
course of a conversation between an IRS agent or officer and a
taxpayer or third party.
In the event the person who has the information refuses to
provide it voluntarily or if the Service for whatever reason
decides not to make an informal request and chooses to proceed
more formally, Congress has given the IRS the power to issue an
administrative summons in order to compel a taxpayer or a third
party to produce the information—in the form of documents or
testimony or both—for use in its investigation. The summons
will describe the information requested and the investigation to
which the IRS thinks that information may be relevant. The
summons will also specify where and when the information must be
produced. If the summoned party does not comply, the IRS must
decide whether it wishes to pursue the matter. If it does, the
Service must ask the Department of Justice to obtain a court
order enforcing the summons. If the court orders enforcement and
the summoned party still refuses to produce the summoned
information, the refusal may result in sanctions for civil or
criminal contempt.
As an attorney for the Department of Justice, one of the most important
things for you to remember when you receive a summons enforcement case is
that the summoned information is important to an ongoing investigation.
Because the summons enforcement process, even when expedited, tends to be
time-consuming, it is unlikely that an agent or revenue officer would ask
for enforcement unless they really need the information to complete their
work. In most cases, the statute of limitations on making assessments,
collecting the taxes, or making a decision to bring a criminal case will
still be running while your summons enforcement case is pending. All of
this means that for summons enforcement to be a valuable tool, cases must be
brought and pursued on an expedited basis. It is our hope that the
information in this Manual will help you litigate the cases knowledgeably
and expeditiously.
II. LAW
A. IRS SUMMONS AUTHORITY
The United States' system of taxation relies on self-assessment and the
good faith and integrity of each taxpayer to disclose completely and
honestly all information relevant to his tax liability. Nonetheless, "it
would be naive to ignore the reality that some persons attempt to outwit the
system." United States v. Bisceglia, 420 U.S. 141, 145 (1975).
Thus, Congress has charged the Secretary of the Treasury and the
Commissioner of Internal Revenue with the responsibility of administering
and enforcing the Internal Revenue Code. See I.R.C.
§§ 7601 and 7602; Madison v. United States, 758 F.2d
573, 574 (11th Cir. 1985).
To this end, Section 7601 of the Code directs the Secretary to make
inquiries into the tax liability of every person who may be liable to pay
any internal revenue tax. Codner v. United States, 17 F.3d 1331,
1332 (10th Cir. 1994). In turn, Section 7602 authorizes the Secretary to
examine books, papers, records, or other data, to issue summonses, and to
take testimony for the purpose of: (1) "ascertaining the correctness of any
return," (2) "making a return where none has been made," (3) "determining
the liability of any person for any internal revenue tax ... ," (4)
"collecting any such liability," or (5) "inquiring into any offense
connected with the administration or enforcement of the internal revenue
laws." See, e.g., United States v. Euge, 444 U.S. 707, 710-11
(1980); United States v. LaSalle Nat'l Bank, 437 U.S. 298, 308
(1978); United States v. Rockwell Int'l, 897 F.2d 1255, 1261 (3d Cir.
1990).
The summons statutes, I.R.C. §§ 7602-7613, provide the
IRS with an investigative device that is to be interpreted broadly in favor
of the IRS. See Euge, 444 U.S. at 714-15 (holding that the language
of § 7602 includes authority to summons some physical evidence,
and upholding a summons for handwriting exemplars). Congress's intent was
to foster effective tax investigations by giving the IRS expansive
information-gathering authority. See United States v. Arthur Young &
Co., 465 U.S. 805, 816 (1984) (citing Bisceglia, 420 U.S. at
146); United States v. Norwest Corp., 116 F.3d 1227, 1231-32 (8th
Cir. 1997). Restrictions on the summons power are to be avoided, absent
unambiguous Congressional direction. See Arthur Young, 465 U.S. at
816; Euge, 444 U.S. at 715. See also United States v. Stuart,
489 U.S. 353, 364 (1989); Robert v. United States, 364 F.3d 988, 996
(8th Cir. 2004). The Supreme Court has cautioned against restricting the
summons authority absent express legislative direction. See Tiffany Fine
Arts, Inc. v. United States, 469 U.S. 310, 318 (1985); United States
v. Barter Sys., Inc., 694 F.2d 163, 167 (8th Cir. 1982); United
States v. Clement, 668 F.2d 1010, 1013 (8th Cir. 1982).
Once a summons is issued, however, it is not self-enforcing. If the
person to whom a summons is issued fails to comply, the Government must seek
judicial enforcement under I.R.C. §§ 7402(b) and
7604(a).[FN1] These sections confer authority upon the United States
district courts to issue orders compelling compliance with an Internal
Revenue Service summons. Because the enforcement of a summons invokes the
process of the court, a court will not enforce a summons if enforcement
would constitute an abuse of that process. United States v. Powell,
379 U.S. 48, 58 (1964); Rockwell Int'l, 897 F.2d at 1261.
B. JUDICIAL REVIEW OF A SUMMONS
The validity of an IRS summons may come before a district court in one
of two ways. First, because a summons is not self- enforcing, the
Government may bring an enforcement proceeding seeking a court order
directing compliance with the summons. (See
Section II(B)(3).)
Second, in the case of a third-party summons, certain persons may be
entitled to bring a proceeding to quash the summons. (See
Section II(B)(4).) Under no circumstance,
however, is a summoned party entitled to bring a proceeding to quash the
summons. (Id.)
- Burdens of production and persuasion
- However a summons proceeding is initiated, the standard and burden of
proof is the same. In either case, the Government bears the ultimate burden
of persuasion. S. Rep. No. 97-494, vol. 1, at 283 (1982), reprinted
in 1982 U.S.C.C.A.N. 781, 1029 ("[a]lthough an action to quash the
summons must be instituted by the taxpayer, the ultimate burden of
persuasion with respect to its right to enforcement of the summons will
remain on the Secretary, as under current law"); see Crystal v. United
States, 172 F.3d 1141, 1143-44 (9th Cir. 1999) (stating that the
Government must make the same showing whether to "defeat a petition to
quash, or to enforce a summons").
- The Government has the initial burden of making a prima facie
showing that the summons is valid. (See
Section II(B)(2).)
But the Government's burden is "a slight one" that can be satisfied by a
declaration from the investigating agent. Crystal, 172 F.3d at
1144; United States v. Garden State Nat'l Bank, 607 F.2d 61, 68 (3d
Cir. 1979); Alphin v. United States, 809 F.2d 236, 238 (4th Cir.
1987); 2121 Arlington Heights Corp. v. IRS, 109 F.3d 1221, 1224 (7th
Cir. 1997); ; United States v. Balanced Fin. Mgmt., Inc., 769
F.2d 1440, 1443 (10th Cir. 1985); In re Newton, 718 F.2d 1015, 1019
(11th Cir. 1983).
- Once the Government makes its prima facie case, the opposing party has a
heavy burden to show that enforcement would be an "abuse of process."
Fortney v. United States, 59 F.3d 117, 120 (9th Cir. 1995). To carry
this burden the challenger must show more than mere legal conclusions, and
must allege specific facts and evidence to support his allegations.
Garden State Nat'l Bank, 607 F.2d at 68; Liberty Fin. Servs. v.
United States, 778 F.2d 1390, 1393 (9th Cir. 1985).
- Requirements for a valid summons
The validity of a summons is measured by standards established
both by the Supreme Court and by Congress.
- The Supreme Court's Powell requirements
- The Supreme Court established the framework for judicial review of a
summons in United States v. Powell, 379 U.S. 48 (1964). In that case
the Court held that the IRS did not have to satisfy any standard of probable
cause in order to issue a valid summons. All that the Government must show
is that the summons (1) is issued for a legitimate purpose; (2) seeks
information that may be relevant to that purpose; (3) seeks information that
is not already within the IRS's possession; and (4) satisfies all
administrative steps required by the Internal Revenue Code. Powell,
379 U.S. at 57-58.
(1) The summons was issued for a legitimate
purpose
Congress has given the IRS broad directions under Section 7601 to
investigate "all persons ... who may be liable" for taxes.
Sections 7602(a) and (b) delineate the purposes for which an IRS
summons may be issued:
- Ascertaining the correctness of any return,
- Making a return were none has been made,
- Determining the liability of any person for any internal
revenue tax or the liability at law or in equity of any
transferee or fiduciary of any person in respect of any
internal revenue tax,
- Collecting any such liability, or
- Inquiring into any offense connected with the administration
or enforcement of the internal revenue laws.
- In Powell, the Supreme Court thus noted that the IRS can issue a
summons to investigate "'merely on suspicion that the law is being violated,
or even just because it wants assurance that it is not.'" 379 U.S. at 57
(quoting United States v. Morton Salt Co., 338 U.S. 632, 642-43
(1950)).
- When the Supreme Court later held that a summons could not be issued in
aid of a criminal investigation, United States v. LaSalle Nat'l Bank,
437 U.S. 298 (1978), Congress enacted Section 7602(b) permitting the use
of summons to gather information in aid of a criminal investigation. See
Scotty's Contracting & Stone, Inc. v. United States, 326 F.3d 785 (6th
Cir. 2003). Section 7602(d), however, prohibits the issuance or the
enforcement of a summons with respect to a person if there is in effect a
"Justice Department referral" as defined in the statute. (See
Section II(B)(2)(b).)
(2) The summoned information may be relevant
- Section 7602 authorizes the IRS to examine "any books, papers, records,
or other data which may be relevant or material." (Emphasis added.)
In United States v. Arthur Young & Co., 465 U.S. 805, 814 (1984), the
Court stated that the language "may be" reflects Congress's express
intention to allow the IRS to obtain "items of even potential
relevance to an ongoing investigation, without reference to its
admissibility." (Emphasis in original.) The IRS need not show that the
"documents it seeks are actually relevant in any technical, evidentiary
sense." Arthur Young, 465 U.S. at 814. In Powell, the
Supreme Court noted that the IRS can issue a summons to investigate "'merely
on suspicion that the law is being violated, or even just because it wants
assurance that it is not.'" 379 U.S. at 57 (quoting Morton Salt, 338
U.S. 642-43). Thus, in applying the Powell test, the question is not
whether the records sought, when disclosed, will contradict a taxpayer's
return, but whether the records "might" throw light upon the correctness of
a return. Arthur Young, 465 U.S. at 814-15 & n.11. The IRS need not
accept the word of the summoned party that records are not relevant. It is
entitled to determine that fact for itself. See Tiffany Fine Arts, Inc.
v. United States, 469 U.S. 310, 323 (1985).
- Relevancy determinations necessarily are factual and normally are
reviewed on appeal only for clear error. United States v. Goldman,
637 F.2d 664, 667 (9th Cir. 1980). Relying on the Supreme Court's
pronouncements in Arthur Young, the various courts of appeals have
had little trouble in construing the Powell relevance standard
broadly.
- Sylvestre v. United States, 978 F.2d 25, 27 (1st Cir.
1992) (records of taxpayer's savings accounts, checking
accounts, and the like are relevant to purpose of determining
possible income tax liability).
- PAA Mgmt., Ltd. v. United States, 962 F.2d 212, 217-18
(2d Cir. 1992) (IRS may seek enforcement of summons even after
issuance of statutory notice of deficiency because Tax Court
could redetermine the correct amount of the deficiency).
- United States v. White, 853 F.2d 107, 116-17 (2d Cir.
1988) (summons for records of attorney/executor of estate
enforced as having "potential" relevance to determination
whether fees were deductible under state law).
- United States v. Rockwell Int'l, 897 F.2d 1255, 1263
(3d Cir. 1990) (liberal standard of relevance to
be applied to determine whether material in "free reserve
file" is relevant to investigation of correctness of
corporation's 1983 tax return).
- Barquero v. United States, 18 F.3d 1311, 1318 (5th Cir.
1994) (IRS may summon records for time-barred years so long as
those records are relevant to later years under
investigation).
- United States v. El Paso Co., 682 F.2d 530, 537 (5th
Cir. 1982), (taxpayer's "tax-pool analysis" documents that
focus on questionable positions in the tax return are highly
relevant even though they were not used in preparing the tax
return).
- United States v. Abrahams, 905 F.2d 1276, 1279 n.1,
1281 (9th Cir. 1990) (summons to attorney for "all documents
relating to preparation of income tax returns for others"
enforced since such documents were likely to "throw light" on
clients' tax returns) overruled on other grounds by United
States v. Jose, 131 F.3d 1325, 1329 (9th Cir. 1997) (en
banc).
- United States v. Giordano, 419 F.2d 564, 568 (8th Cir.
1969) (holding that the Commissioner is "licensed to fish").
But see United States v. Dauphin Deposit Trust Co., 385
F.2d 129, 131 (3d Cir. 1968) (IRS "is not entitled to go on a
fishing expedition .... [but] must identify with some
precision the documents it wishes to inspect").
- The relevancy test for a summons is a relatively low one, but it is not
non-existent. The Government must establish that there is some realistic
expectation (more than an idle hope) that the summoned information may be
relevant to its investigation. Although the summoned documents or
information need not meet the evidentiary relevancy requirement for
admissibility, the Government should show some logical connection between
the information sought and the purpose of the exam. In most cases, the
potential relevance of the summoned information is self- evident. In other
instances, an explanation may be helpful.
- United States v. Matras, 487 F.2d 1271, 1275 (8th Cir.
1973) (A corporation not required to produce copies of its
budgets when the IRS justified its request on the need for a
"roadmap" to better understand the corporation's operations.
"The term 'relevant' connotes and encompasses more than
'convenience.' ... If we were to accede to the government's
view, it is difficult to imagine corporate materials that
might not contribute to a more comprehensive understanding of
the workings of the corporation, and thus, according to the
government, be deemed relevant to the tax investigation.").
- David H. Tedder & Assocs. v. United States, 77 F.3d
1166, 1169 (9th Cir. 1996) (names of a law firm's clients need
not be revealed when the IRS did not demonstrate that the
specific client identities "might throw light upon the
correctness" of the taxpayer's return).
- United States v. Monumental Life Ins. Co., 440 F.3d 729
(6th Cir. 2006) ("The present case exemplifies an exceptional
circumstance where automatic reliance upon an agent's
affidavit is not adequate because (1) the subpoena is directed
to a third party, not to the taxpayer being investigated, (2)
the IRS seeks a voluminous amount of highly sensitive
propriety information about Monumental's general
administration of its products, (3) the IRS has opposed the
imposition of a protective order, and (4) the magistrate
judge, who spent years considering the scope of the summons,
found that the IRS was seeking 'some irrelevant
information.'")
The results in these cases thus might have been different if the
potential relevance of the summoned information had been better
described.
(3)The summoned information is not already in the
possession of the IRS
- To satisfy the third Powell requirement, the IRS must show that
the summoned information is not already in the IRS's possession. As noted
above, the simple statement in the IRS agent's declaration that the summoned
information is not in the possession of the IRS is sufficient to shift the
burden of proof to the party opposing enforcement to come forward with
evidence to the contrary. This Powell requirement may not be
satisfied, however, when someone in the IRS other than the declaring agent
has the summoned information and it is available for use in the exam.
- The courts have "declined to apply a literal interpretation of this
Powell criterion in favor of a practical approach to IRS
accessibility." United States v. John G. Mutschler & Assocs., Inc.,
734 F.2d 363, 367-68 (8th Cir. 1984). The Fifth Circuit explained this
"practical approach" as follows:
- The "already possessed by government" defense originated in the passage
of United States v. Powell [ ], for which the Supreme Court cited no
authority. Powell construed not only the implicit prerequisites to
enforceability of a summons issued under 26 U.S.C. §§ 7602,
7604(b), but also the explicit limitation contained in 26 U.S.C.
§ 7605(b), which forbids "unnecessary" summonses. Read in
context, we construe the "already possessed" principle enunciated by
Powell as a gloss on § 7605(b)'s prohibition of
"unnecessary" summonses, rather than an absolute prohibition against the
enforcement of any summons to the extent that it requests the production of
information already in the possession of the IRS.
United States v. Davis, 636 F.2d 1028, 1037 (5th Cir.
1981). But see United States v. Monumental Life Ins. Co.,
440 F.3d 729 (6th Cir. 2006) (rejecting claim that documents
obtained by IRS in the course of investigating another taxpayer
were not accessible because of the confidentiality provisions of
I.R.C. § 6103(a)).
- The following are instances where the courts have applied the practical
approach to IRS accessibility.
- Difficult to retrieve—United States v. First Nat'l
State Bank, 616 F.2d 668, 673-74 (3d Cir. 1980) (the IRS
can summon documents that may be in its possession but which
are difficult to retrieve). See also United States
v. Linsteadt, 724 F.2d 480, 484 (5th Cir. 1984);
cf. United States v. Theodore, 479 F.2d 749, 755 (4th
Cir. 1973) (court refused to enforce a summons directed to a
tax preparer for copies of all the returns of his clients for
three years because there was no record evidence that the IRS
could not readily retrieve the information).
- Different versions—United States v. Davey, 543
F.2d 996, 1001 (2d Cir. 1976) (may demand production of
original documents rather than copies); United States v.
Luther, 481 F.2d 429, 432 (9th Cir. 1973) (access to
records from other sources "does not destroy the government's
right to inspect the original and primary records of the
Corporation"); United States v. Daffin, 653 F.2d 121,
124 (4th Cir. 1981) (retained copies of tax returns to compare
with the originals filed with the IRS).
- Second look—Spell v. United States, 907 F.2d
36, 38 (4th Cir. 1990) (taxpayer may not refuse to comply with
summons issued by special agent merely because his returns
were examined previously by revenue agent); United States
v. Lang, 792 F.2d 1235, 1242 (4th Cir. 1986) (allowing a
"second look" for a different and additional purpose);
United States v. Morgan, 761 F.2d 1009, 1011 (4th Cir.
1985) (special agent's fraud inquiry is considered a
continuation of the original, uncompleted audit); United
States v. Popkin, 623 F.2d 108, 109 (9th Cir. 1980) (per
curiam) (examination by revenue agent does not "fulfill the
needs of a special agent investigating fraud"); United
States v. Lenon, 579 F.2d 420, 422 (7th Cir. 1978) (fraud
investigation "different in both approach and extent" from a
routine audit); United States v. Garrett, 571 F.2d
1323, 1328-29 (5th Cir. 1978) (IRS's entitlement to a single
meaningful examination may necessitate additional scrutiny of
documents by the special agent).
(4)The summons meets all administrative
requirements
- The fourth element of the Powell test is that the IRS comply with
the administrative steps required by the Code. These steps include service
on the summoned party and, in the case of a third-party summons, notice to
any person identified in the summons.
- Courts occasionally have excused minor failures to comply with the
required administrative steps provided that the taxpayer has not been
prejudiced thereby. United States v. Texas Heart Inst., 755 F.2d
469, 478 (5th Cir. 1985) (provided that the taxpayer has had "every
benefit of the administrative steps required by the Code, a failure by
the IRS to meet the technical niceties of the statute will not bar
enforcement") (emphasis in original), overruled on other grounds,
United States v. Barrett, 837 F.2d 1341 (5th Cir. 1988); United
States v. Privitera, 75 A.F.T.R.2d (RIA) 1266, 1266 (9th Cir. 1995)
("Minor violations will be excused where the IRS acts in good faith and
there is no prejudice to the taxpayer."). But even though the Sixth Circuit
allowed enforcement of a summons despite a nonprejudicial administrative
deficiency, it cautioned that it expected the IRS to strictly adhere to all
administrative niceties in future cases. See Cook v. United States,
104 F.3d 886 (6th Cir. 1997). In other words, "technical" violations should
be not treated lightly.
- Service on the summoned party —Section 7603
specifies how a summons should be served on the summoned
party. Part (a) provides the general method of service—"by
an attested copy delivered in hand to the person to whom it is
directed, or left at his last and usual place of abode." An
attested copy is merely a copy of the original summons with an
signed statement on its face that it is a true and accurate
copy. Mimick v. United States, 952 F.2d 230 (8th Cir.
1991). Part (b) provides that summonses issued to "third-
party recordkeepers," as that term is defined in Section
7603(b)(2), may be served "by certified or registered mail to
the last known address" of the summoned party. I.R.C. §
7603(b)(1) "Third-party recordkeepers" include banks,
financial institutions, credit card companies, attorneys, and
accountants. The mandates of Rule 4 of the Federal Rules of
Civil Procedure do not apply to the service of IRS summonses.
United States v. Gilleran, 992 F.2d 232, 233 (9th Cir.
1993); United States v. Bichara, 826 F.2d 1037, 1039
(11th Cir. 1987). Section 7603(a) also provides that "a
certificate of service signed by the person serving the
summons shall be evidence of the facts it states on the
hearing of an application for the enforcement of the
summons."
- Notice to others of a third-party summons—Section
7609(a)(1) requires that a person identified in a summons
receive notice if the summons seeks information "with respect
to" that person. The most obvious case is when a third party
(i.e., bank) is summoned to produce records relating to
a taxpayer's examination. In that case the taxpayer must
receive notice of the summons. The less obvious case is when
a third party is summoned to produce another person's records
(i.e., parent's, girlfriend's) in connection with a
taxpayer's examination. Any other person whose records are
identified in the summons should receive notice.
- Section 7609(a) also establishes the method of such notice, which can be
provided in person or by certified or registered mail. It must be served
within three days after the summons is served and at least 23 days before
the summons compliance date. The notice must include a copy of the summons
and an explanation of that person's right to bring a proceeding to quash the
summons. Several courts have held that the notice copy need not include the
attestation required of the copy served on the summoned party. Codner v.
United States, 17 F.3d 1331, 1333-34 (10th Cir. 1994); Fortney v.
United States, 59 F.3d 117, 120-21 (9th Cir. 1995). In United States
v. Mimick, 952 F.2d at 231-32, however, the Eighth Circuit held that
attested copies must be served on both the summoned party and any
noticee.
- Notice to taxpayer of third-party contact—Section 7602(c), added to the Code as part of the Internal
Revenue Service Restructuring and Reform Act of 1998, Pub. L.
No. 105-206, § 3417(a), 112 Stat. 685, 757-58, provides
that "[a]n officer or employee of the Internal Revenue Service
may not contact any person other than the taxpayer with
respect to the determination or collection of the tax
liability of such taxpayer without providing reasonable notice
in advance to the taxpayer that contacts with persons other
than the taxpayer may be made." Failure to notify taxpayer of
a third-party contact is a serious defect. In United
States v. Jillson, 84 A.F.T.R.2d (RIA) 99-7115 (S.D. Fla.
1999), the court denied enforcement of summonses to third
parties because the IRS had not issued a notice of contact to
the taxpayer prior to issuing the summonses.
- No "Justice Department referral" is in effect— §
7602(d)
- In addition to satisfying the Powell requirements, a summons must
also satisfy a specific statutory requirement. In LaSalle Nat'l Bank,
437 U.S. 298 (1978), the Supreme Court held that a summons could not be
issued in aid of a criminal investigation. Congress responded four
years later by enacting Section 7602(b), which permits the use of a summons
to gather information in aid of a criminal investigation. Tax Equity and
Fiscal Responsibility Act of 1982 (TEFRA), Pub. L. No. 97-248,
§ 333(a), 96 Stat. 324, 621-22. Section 7602(d), however, enacted
at the same time, precludes either the issuance of a summons or the
commencement of a proceeding to enforce it once a "Justice Department
referral" is in effect with respect to the person whose liabilities are
under investigation. The phrase "Justice Department referral" is a term of
art and embraces the following:
A Justice Department referral is in effect with respect to any
person if—
(i) the Secretary has recommended to the Attorney General a grand
jury investigation of, or the criminal prosecution of, such
person for any offense connected with the administration or
enforcement of the internal revenue laws, or
(ii) any request is made under section 6103(h)(3)(B) for the
disclosure of any return or return information (within the
meaning of section 6103(b)) relating to such person.
I.R.C. § 7602(d)(2)(A).
- Each taxable period and each tax imposed by a separate IRC chapter are
treated separately. I.R.C. § 7602(d)(3). Thus, a summons issued
with respect to the examination of the 1979 and 1980 years was proper,
despite an indictment alleging tax crimes for 1976 and 1977.
Commissioner v. Hayes, 631 F. Supp. 785, 787 (N.D. Cal. 1985).
See also United States v. Pittman, 82 F.3d 152, 157 (7th Cir.
1996) (offenses related to taxes from different chapters of the IRC or
offenses under different titles, such as Title 26 (taxes) and Title 31
(money laundering) are treated separately).
- In general, courts have recognized that Section 7602(d) created a bright
line, with a "Justice Department referral" being the line of demarcation.
See Scotty's Contracting & Stone, 326 F.3d 785 (collecting cases).
But the law in the Fourth and Seventh Circuits is not entirely clear.
United States v. Berg, 20 F.3d 304, 309 n.6 (7th Cir. 1994) (noting
that the IRS "cannot use its summons authority if its only purpose is to
gather evidence for a criminal investigation, (i.e. if it has "'no civil
purpose whatsoever' and [it] 'has abandoned any institutional pursuit of
civil tax determination.'") (citations omitted). Compare Hintze
v. IRS, 879 F.2d 121, 127 (4th Cir. 1989) (stating that the summons may
have been quashed if the taxpayers had shown "that the IRS was pursuing its
investigation for the sole purpose of building a case on anticipated
criminal charges"), overruled on other grounds, Church of
Scientology v. United States, 506 U.S. 9, 15 n.8 (1992), with
Morgan, 761 F.2d at 1012 (stating that Section 7602(d) "drew a 'bright
line' indicating that the summons power ended at the point where an
investigation was referred to the Justice Department for prosecution"
(citations omitted)). In the Fourth and Seventh Circuits, it is important
that the agent's declaration clearly state that the IRS has not abandoned
its civil purpose. Thus, for example, when a summons is issued by a Special
Agent in aid of a criminal investigation, the declaration should indicate
that any related civil liabilities, which may include penalties, have not
been finally determined and the information sought is relevant to that
determination as well.
- The IRS may not issue a summons or seek to enforce it if the IRS already
has made an institutional decision to make a "Department of Justice
referral." Such conduct would constitute bad faith. United States v.
Jose, 131 F.3d 1325, 1328 (9th Cir. 1997) (en banc) ("It is well
established that the IRS is acting in bad faith if it pursues a summons
enforcement after having already decided to make a recommendation for
prosecution ....") (citing LaSalle Nat'l Bank, 437 U.S. at 317 and
United States v. Stuart, 489 U.S. 353, 362 (1989)).
- Requirements to summon certain subject matters
Special procedures apply to summonses seeking information
concerning certain subjects.
(1) Cable Communications Policy Act
- The Service takes the position that it must comply with Section 631 the
Cable Communications Policy Act of 1984,[FN2]47 U.S.C.
§ 551, when issuing a summons to a cable company. Chief
Counsel Advisory, IRS CCA 200230034, 2002 WL 1730123. Section 551(c)(1)
generally prohibits a cable company from disclosing a subscriber's
"personally identifiable information," without the prior written or
electronic consent of the subscriber concerned. "Personally identifiable
information" "does not include any record of aggregate data which does not
identify particular persons." 47 U.S.C. § 551(a)(2)(A).[FN3]
- If the cable company provides either internet or telephone service in
addition to cable television service, however, disclosure of the information
relevant to the internet or telephone service is not restricted by
Section 551 of the Cable Act. Disclosure of information relevant to
internet or telephone service is permitted under Section 2703(c)(2) of the
Electronic Communications Privacy Act, 18 U.S.C., and Section 551(c)(2)(D)
of the Cable Act. See In re Application of the United States of Am. for
an Order Directed to Cablevision Sys. Corp., 158 F. Supp. 2d 644 (D. Md.
2001).
- Where Section 551 of the Cable Act applies, it is subject to several
exceptions, including one that permits disclosure in response to a court
order obtained by a governmental entity.[FN4] 47 U.S.C.
§ 551(c)(2)(B). Such an order, however, (1) must be based on
clear and convincing evidence that the subscriber is reasonably suspected of
having engaged in criminal activity and that the information sought would be
material evidence in the case, and (2) must be obtained in a proceeding in
which the subscriber is afforded the opportunity to appear and contest the
claim. 47 U.S.C. § 551(h). See United States v. Cox
Cable Communications, 81 A.F.T.R.2d (RIA) 2011 (N.D. Fla. 1998) (holding
the IRS satisfied the requirements of Section 551(h) with the agent's
declaration).
(2) Health Insurance Portability and Accountability Act
(HIPAA)
- When the IRS requests health information protected by the Health
Insurance Portability and Accountability Act (HIPAA) of 1996 Privacy
Regulations, 45 C.F.R. parts 160 and 164, from a "covered entity"
(e.g., a physician, healthcare organization, health insurer, etc.),
it may have additional burdens to meet in order to secure the information.
"Protected health information" is defined, inter alia, as
information, in any form, maintained by a covered entity that can identify
the individual and relates to that individual's health, receipt of
healthcare services, or the past, present, or future payment for the
healthcare services provided. See 45 C.F.R. § 160.103.
Additionally, documents containing information that would identify the
healthcare recipient's relatives, employers, or household members can also
qualify as protected information. 45 C.F.R. § 164.514(b).
- Three exceptions allow the Service to obtain protected health
information while enforcing the Internal Revenue Code: the consent of the
taxpayer, the law enforcement exception, and the administrative and judicial
proceedings exception. Chief Counsel Notice CC-2004-034, addresses the
standards for applying those exceptions. IRS CCN CC-2004-034, 2004 WL
3210766.
- An administrative summons issued under Section 7602(a)(2) qualifies
under the law enforcement exception. In addition to the usual requirements
for enforcement, however, a summons seeking protected health information
must satisfy a three-pronged test: (1) the information sought must be
"relevant and material" to a "legitimate law enforcement inquiry"; (2) the
request must be "specific and limited in scope to the extent reasonably
practicable in light of the purpose for which the information is sought";
and (3) "[d]e-identified information could not reasonably be used." 45
C.F.R. § 164.512(f)(1)(ii)(C). The privacy rules list eighteen
specific identifiers, ranging from traditional categories such as name and
address to less traditional categories such as web addresses, biometric
identifiers (e.g., finger and voice prints), account numbers, and
vehicle identification numbers (e.g., license plates).
- To satisfy the requirements of the three-pronged test, the Service is to
supplement any summons for protected health information with a statement
that the three additional requirements have been met. CC-2004-034, *4. A
covered entity may reasonably rely on such a statement and produce the
summoned information. 45 C.F.R. § 164.514(h)(2). A declaration
accompanying a request to bring a summons enforcement action should
incorporate the requirements of the three-pronged test and represent that
they have been satisfied.
(3)Tax accrual workpapers
- Special rules apply when issuing and seeking enforcement of a summons
issued for tax accrual workpapers. Enforcement of such summonses should be
handled by the Tax Division. As a matter of practice, the Deputy Assistant
Attorney General (Civil Trial Matters) and the appropriate Section Chief
should be notified whenever a suit to enforce a summons for tax accrual
workpapers has been received by the Tax Division.
- Tax accrual workpapers are documents and memoranda relating to an
auditor's evaluation of a taxpayer's reserves for contingent tax
liabilities. Such workpapers may contain information pertaining to the
taxpayer's financial transactions, identify questionable positions taken on
tax returns, and reflect the auditor's opinions regarding the validity of
such positions. United States v. Arthur Young & Co., 465 U.S. 805
(1984); United States v. El Paso Co., 682 F.2d 530, 533-35 (5th Cir. 1982).
Tax accrual workpapers are generally prepared as a part of the process of
auditing a corporation's financial statements, not as part of the tax return
preparation process. The tax accrual workpapers can be prepared by in-house
or outside accountants.
- In Arthur Young, the Supreme Court rejected the argument that the
workpapers were privileged. A summons for tax accrual workpapers is
enforceable so long as the documents meet the low threshold of relevance and
the other Powell requirements for enforcement.
- The IRS, however, has adopted a policy of restraint in seeking tax
accrual workpapers. Announcement 2002-63, 2002-2 C.B. 72; I.R.M. 4.10.20.
Consequently, there is little case law on this subject, and even after
Arthur Young, courts may entertain assertions of work-product and
other privileges. See, e.g., United States v. Rockwell Int'l, 897
F.2d 1255 (3d Cir. 1990) (reversing the enforcement of a
summons seeking tax accrual workpapers when the district court failed to
also consider whether the documents were protected by the attorney-client
privilege).
- Enforcement actions
If the summoned party fails to comply with the summons, Section
7604 provides the United States with a means to enforce the
summons by filing an enforcement proceeding in federal district
court. (See, Section III.A.)
- No conditional enforcement
- There is no authority for a court to conditionally enforce a
summons. United States v. Jose, 131 F.3d 1325 (9th Cir. 1997) (en
banc); United States v. Barrett, 837 F.2d 1341, 1350-51 (5th Cir.
1988) (en banc) (per curiam).[FN5] The power of the court in a summons
enforcement case is "'strictly limited to granting or denying enforcement of
the terms of the specific summons.'" United States v. Abrahams, 905
F.2d 1276, 1287 (9th Cir. 1990) (quoting United States v. First Nat'l
State Bank, 540 F.2d 619, 624-25 (3d Cir. 1976)). Nothing in the
Internal Revenue Code authorizes a court to engraft "equitable" requirements
on its enforcement order so as to limit the IRS's internal use of the
summoned information. See Reisman v. Caplin, 375 U.S. 440 (1964)
(injunction issued against IRS summons dismissed for want of equity);
United States v. First Family Mortgage Corp., 739 F.2d 1275, 1278
(7th Cir. 1984) (Tax Anti-Injunction Act barred taxpayer's request for an
injunction against IRS's use of summoned information). Although the summons
power is not absolute, restrictions on that authority should not be imposed
"'absent unambiguous directions from Congress.'" United States v. Arthur
Young & Co. , 465 U.S. 805, 816 (1984) (quoting United States v.
Bisceglia, 420 U.S. 141, 150 (1975)).
- Withdrawal and reissuance
- It is always the IRS's prerogative to withdraw a summons it has issued;
and in most cases, if not all, it is free to reissue the summons. In the
case where a procedural defect is detected, consider whether withdrawal and
reissuance would be appropriate. Some courts have overlooked technical
defects in the issuance of a summons where the taxpayer or summoned party
has not suffered prejudice. United States v. Texas Heart Inst., 755
F.2d 469 (5th Cir. 1985), overruled on other grounds by United States v.
Barrett, 837 F.2d 1341 (5th Cir.1988) (en banc) (per curiam);
Sylvestre v. United States, 978 F.2d 25, 27- 28 (1st Cir. 1992);
United States v. Bank of Moulton, 614 F.2d 1063, 1066 (5th Cir.
1980). But not all courts do it lightly. In Cook v. United States,
104 F.3d 886 (6th Cir. 1997), the IRS had provided the taxpayers with just
22 days notice of the compliance date for a third-party summons, instead of
the 23 days mandated by Section 7609(a)(1). The Sixth Circuit affirmed the
denial of the taxpayers' petition to quash, as taxpayers conceded that they
had suffered no actual prejudice from the violation, but cautioned that its
decision should not be taken as "a license to ignore statutory deadlines or
to negligently violate other legal requirements" and that the "court shall
review future violations of technical legal requirements by the I.R.S. and
its agents and attorneys with an increasingly critical eye." 104 F.3d at
890-91.
- When an IRS summons is withdrawn, a petition to quash that summons
becomes moot. Malone v. Humphrey, 237 F.2d 55 (6th Cir. 1956);
Gillings v. United States, 95 A.F.T.R.2d (RIA) 1014 (9th Cir. 2005);
Pintel v. United States, 74 A.F.T.R.2d (RIA) 5105 (C.D. Cal. 1994).
Dame v. United States, 643 F. Supp. 533, 534 (S.D.N.Y. 1986);
Kearns v. United States, 580 F. Supp. 8, 10 (S.D. Ohio 1983); Pac.
Fisheries, Inc. v. United States, 94 A.F.T.R.2d (RIA) 5953 (W.D. Wash.
2004); Dollar v. United States, 57 A.F.T.R.2d (RIA) 998 (W.D. Wash.
1985).
- Effect of taxpayer appeal
(1) Order is enforceable unless stayed
- In the absence of a stay pending appeal, once a district court orders a
summons enforced, the summoned party must comply with the court's order,
notwithstanding the taking of an appeal. On occasion, taxpayers have
contended that they were entitled to a stay of a summons enforcement order
under Fed. R. Civ. P. 62(d), which provides that a stay may be obtained "by
giving a supersedeas bond."[FN6] But a stay under Rule 62(d) is "subject to
the exceptions contained in subdivision (a) of [the] rule." Rule 62(a)
provides an automatic 10-day stay of execution upon a judgment or of
proceedings for its enforcement, but excepts from its scope "an
interlocutory or final judgment in an action for an injunction" and directs
that the discretionary provisions of subdivision (c) "govern the suspending,
modifying, restoring, or granting of an injunction during the pendency of an
appeal." The automatic stay provisions of Rule 62(a) and (d) are thus most
often, if not always, confined to cases involving money judgments. See,
e.g., Hebert v. Exxon Corp., 953 F.2d 936, 938 (5th Cir. 1992) ("Courts
have restricted the application of Rule 62(d)'s automatic stay to judgments
for money because a bond may not adequately compensate a non-appealing party
for loss as a result of the stay of a non-money judgment."). We know of no
case holding that a summons enforcement order was subject to an automatic
stay.
- A party, however, may seek a discretionary stay of an enforcement order
pending appeal, as it might any other order or judgment. See Fed. R.
Civ. P. 62 and Fed. R. App. P. 8. Ordinarily, the party seeking a stay must
first move for a stay in the district court. Fed. R. App. P. 8(a)(1). A
motion for a stay may be made to the court of appeals, if the movant can
show that moving first in the district court would be impracticable or can
state that the district court has denied the movant's request for a stay.
Fed. R. App. P. 8(a)(2)(A).
- The standards for determining whether a stay pending appeal should be
granted require that the moving party establish: (i) a "strong" showing that
it will prevail on the merits on appeal; (ii) that irreparable injury will
result unless the stay is granted; (iii) that issuance of a stay will result
in no substantial harm to other interested persons; and (iv) that issuance
of a stay will result in no substantial harm to the public interest.
Hilton v. Braunskill, 481 U.S. 770, 776 (1987); Adams v.
Walker, 488 F.2d 1064, 1065 (7th Cir. 1973). If the movant fails to
establish that he satisfies all four requirements, he will not be entitled
to a stay.
- Courts are not likely to grant a stay pending appeal of a summons
enforcement order.
A stay pending appeal from [an order enforcing] a summons should not be
granted as a matter of course, but only when there is a substantial
possibility of success, and then on terms designed to expedite the appeal
and, if necessary and appropriate, to protect against the running of any
applicable statute of limitations.
In re Turner, 309 F.2d 69, 72 (2d Cir. 1962) (cited in
Multistate Tax Comm'n v. United States Steel Corp., 659
F.2d 931, 932 (9th Cir. 1981)).
(i) Likelihood of success on the merits—Given the IRS's
broad investigative power and the highly deferential clear error
standard of review, see, e.g., United States v. Claes, 747
F.2d 491, 495-96 (8th Cir. 1984), once the district court has
determined that the Powell requirements have been
satisfied, the movant usually has little, if any, likelihood of
overturning a summons enforcement order on appeal. After all,
Section 7602 gives the IRS broad, although not unlimited, power
to investigate. It extends the summons power to the examination
of "any books, papers, records, or other data which may be
relevant or material" to an inquiry. I.R.C. § 7602(a)
(emphasis added). "The language 'may be' reflects Congress'
express intention to allow the IRS to obtain items of even
potential relevance to an ongoing investigation, without
reference to its admissibility." Arthur Young, 465 U.S.
at 814 (emphasis in original). On that ground alone, a stay
should usually be denied. But the other requirements are equally
formidable.
(ii) Irreparable injury in the absence of a stay þ
Historically, a movant might have argued he would be irreparably
injured if a stay were not granted, because compliance with the
summons would moot his appeal from the enforcement order.
However, this argument has been taken away. In Church of
Scientology v. United States, 506 U.S. 9 (1992), the Supreme
Court held that compliance with IRS summonses did not moot an
appeal from an enforcement order issued by a district court
because "if the summons were improperly issued or enforced a
court could order that the IRS's copies of the tapes be either
returned or destroyed." 506 U.S. at 15.
- So, too, any alleged damage to the movant's business or reputation
caused by compliance with a summons enforcement order does not constitute
irreparable harm as a matter of law. See Acierno v. New Castle
County, 40 F.3d 645, 653 (3d Cir. 1994) (preliminary injunction case:
"[e]conomic loss does not constitute irreparable harm"); Morton v.
Beyer, 822 F.2d 364, 371 (3d Cir. 1987) (preliminary injunction case:
"we do not believe that loss of income alone constitutes irreparable
harm").
(iii—iv) The balance of hardships and the public
interest—Because the Government is always a party to the
summons enforcement proceeding, the third and fourth criteria for
granting a stay under Hilton v. Braunskill, 481 U.S. at
776, namely, that issuance of a stay will result in no
substantial harm to other interested persons and will result in
no substantial harm to the public interest, merge into one.
See Washington Metro. Area Transit Comm'n v. Holiday Tours,
Inc., 559 F.2d 841, 843 (D.C. Cir. 1977) ("[t]he interest of
the Commission and of the riding public is largely the same as
that of the general public"). In that regard, the public's
interest in the efficient and even-handed administration of the
revenue laws is never served by a stay. It has long been
recognized that the Government needs "to assess and collect taxes
as expeditiously as possible with a minimum of preenforcement
judicial interference." Bob Jones Univ. v. Simon, 416
U.S. 725, 736 (1974). The information provided by a summons
plays an important role in the process of enforcing the tax laws.
When a summons is not complied with promptly, the Government must
take a detour from the orderly road of its investigation. These
delays hamper the progress of enforcement and contravene the
public interest. Cf. United States v. Kis, 658
F.2d 526, 540 (7th Cir. 1981) (noting "Congress's concern that
summons enforcement proceedings be concluded rapidly"). The
public's interest in vigorous and thorough enforcement of the
revenue laws should thus always weigh heavily against granting a
stay.
(2) Compliance does not moot an appeal
- "It has long been settled that a federal court has no authority 'to give
opinions upon moot questions or abstract propositions, or to declare
principles or rules of law which cannot affect the matter in issue in the
case before it'. ... For that reason, if an event occurs while a case is
pending on appeal that makes it impossible for the court to grant 'any
effectual relief whatever' to a prevailing party, the appeal must be
dismissed." Church of Scientology, 506 U.S. at 12 (quoting Mills
v. Green, 159 U.S. 651, 653 (1895)). Relying on these principles, the
Government used to contend that compliance with a summons mooted an appeal
of the district court's enforcement order. But that is no longer true.
- In Church of Scientology, the Government acquired possession
of two summoned tape recordings, after the District Court ordered
enforcement of the summons, but while the enforcement order was on appeal.
Relying on the authority of the majority (eight of nine) of the Circuit
Courts of Appeal that had considered the issue, the Government moved to
dismiss the appeal on the ground of mootness. The Ninth Circuit agreed and
dismissed the appeal. The Supreme Court granted certiorari to consider the
issue. Instead of relying on the line of cases cited by the Government
involving IRS summonses, the Court chose instead to rely on numerous
decisions holding that compliance with a district court order enforcing a
Federal Trade Commission subpoena did not moot an appeal of the enforcement
order. Consequently, the Supreme Court held that compliance with an order
enforcing an IRS summons did not moot an appeal of the enforcement
order, because "if the summons were improperly issued or enforced a court
could order that the IRS's copies of the [summoned material] be either
returned or destroyed." 506 U.S. at 15.
- Although Church of Scientology was a loss for the Government, it
is not without benefit. If nothing else, it precludes a losing party from
contending that it should be entitled to a stay pending appeal on the ground
that compliance with the summons enforcement order would result in the
irreparable harm of mooting the appeal.
- Remedies for failure to obey enforcement order
- If a party ordered to comply with an IRS summons does not obey that
order, the Government may move by way of contempt proceedings to compel
compliance. See, e.g., United States v. Brown, 918 F.2d 82 (9th Cir.
1990); United States v. Riewe, 676 F.2d 418, 421 (10th Cir. 1982).
District courts have inherent power to enforce compliance with orders
through contempt. Shillitani v. United States, 384 U.S. 364, 370
(1966).
- Contempt of court is defined in Blacks Law Dictionary as conduct that
defies the authority or dignity of a court. A motion for contempt in
federal court, whether civil or criminal, is premised on 18 U.S.C.
§ 401(3), which provides that "[a] court of the United States
shall have power to punish by fine or imprisonment, or both, at its
discretion, such contempt of its authority, and none other, as ...
[d]isobedience or resistance to its lawful writ, process, order, rule,
decree, or command."
- In contrast to criminal contempt, civil contempt is designed to force
the contemnor to comply with an order of the court. Int'l Union, United
Mine Workers v. Bagwell, 512 U.S. 821 (1994). A district court may
impose a sanction for contempt only if it finds that the party requesting
the sanction has proven contempt by clear and convincing evidence.
Peterson v. Highland Music, Inc., 140 F.3d 1313, 1323 (9th Cir.
1998); Chicago Truck Drivers v. Bhd. Labor Leasing, 207 F.3d 500, 505
(8th Cir. 2000).
- For a party to be held in contempt, it must be shown that: (1) a valid
order existed, (2) the party had knowledge of the order, and (3) the party
disobeyed the order. Reliance Ins. Co. v. Mast Constr. Co., 159 F.3d
1311, 1315 (10th Cir. 1998). The moving party is required only to establish
a prima facie case of contempt by demonstrating that certain conduct
was required by a previous court order and that the alleged contemnor failed
to comply with that order. United States v. Hayes, 722 F.2d 723, 725
(11th Cir. 1984). A prima facie case for contempt may be made either by
affidavits attached to the petition, or by sworn testimony presented in open
court. The show cause order places on the alleged contemnor the burden of
showing why he should not be held in contempt. United States v.
Rylander, 460 U.S. 752, 757 (1983). The defendant must present some
evidence to explain or justify his failure to produce the requested
information. McPhaul v. United States, 364 U.S. 372, 379
(1960); Morrison v. California, 291 U.S. 82, 88-89 (1934).
- The only question at the contempt stage is whether the contemnor has the
present ability to obey the court's enforcement order. In raising
this defense, the defendant bears the burden of production.
Rylander, 460 U.S. at 757. The defendant does not meet this burden
simply by alleging nonpossession of the summoned documents and asserting a
Fifth Amendment privilege. Rylander, 460 U.S. at 758-62, United
States v. Rue, 819 F.2d 1488 (8th Cir. 1987).
- Any questions regarding the propriety of the summons and whether it
should have been enforced must have been raised in the enforcement hearing.
Rylander, 460 U.S. at 757. "[The] contempt proceeding does not open
to reconsideration the legal or factual basis of the order alleged to have
been disobeyed and thus become a retrial of the original controversy."
Maggio v. Zeitz, 333 U.S. 56, 69 (1948).
- In the contempt proceeding the summoned party must be able to show that
he or she had made all reasonable efforts to comply with the summons to
avoid contempt. See United States v. Seetapun, 750 F.2d 601, 605-06
(7th Cir. 1984); Hayes, 722 F.2d at 725-26. A defendant
"demonstrates [an] inability to comply [with a court order] only by showing
that he has made 'in good faith all reasonable efforts to comply.'"
United States v. Roberts, 858 F.2d 698, 701 (11th Cir. 1988)
(citation omitted) (affirming contempt where contemnor's record searches did
not amount to "all reasonable efforts").
- In United States v. Hayes, 722 F.2d 723, Hayes, a summoned
tax promoter, partially complied with an order enforcing the summons, but
claimed that some of the documents were being held in Switzerland by Hayes's
business partner, who refused to release them. Despite Hayes's alleged
"diligent requests" involving trips to Switzerland to obtain the documents,
the appellate court found that Hayes failed to make "all reasonable efforts"
to comply with the order: "[O]ther avenues for obtaining the material were
never explored." Hayes failed to take any actions against his business
partner, including researching his legal rights, threatening his business
partner with legal action, or consulting an attorney. "He cannot carry his
burdenþ merely by adducing evidence that he has requested the
documents, when it appears that he has greater leverage at his disposal."
722 F.2d at 725-26 (emphasis in original).
- Because such contumacious conduct interferes with the administration of
justice, it is punishable by coercive sanctions to induce compliance, or by
remedial sanctions to compensate an aggrieved party for losses sustained for
past disobedience of the court's order. Feltner v. Title Search Co.,
283 F.3d 838, 841 (7th Cir. 2002). In fashioning sanctions for civil
contempt, district courts should consider "the character and magnitude of
the harm threatened by continued contumacy, and the probable effectiveness
of any suggested sanction in bringing about the result desired." United
States v. United Mine Workers, 330 U.S. 258, 304 (1947). Appropriate
sanctions may include a coercive daily fine, a compensatory fine, or
coercive incarceration. Int'l Union, 512 U.S. 821; United States
v. Marquardo, 149 F.3d 36 (1st Cir. 1998); O'Connor v. Midwest Pipe
Fabrications, Inc., 972 F.2d 1204, 1211 (10th Cir. 1992).
(1) Coercive Fines
- When fixing the amount of coercive daily fines, district courts must
also consider "the amount of defendant's financial resources and the
consequent seriousness of the burden to that particular defendant."
United Mine Workers, 330 U.S. at 304. One appellate court upheld
fines of $5,000 a day for failure to turn over documents pursuant to a
summons enforcement order. United States v. Darwin Constr. Co., 873
F.2d 750 (4th Cir. 1989). Coercive fines may exceed the $1,000 criminal
fine under Section 7210 for failure to comply with a summons. United
States v. Hefti, 879 F.2d 311, 315 (8th Cir. 1989).
(2) Coercive Imprisonment
- The basis for permitting a court summarily to order coercive
imprisonment for recalcitrant persons without affording them the safeguards
of a criminal proceeding is that the contemnors hold "the keys of the prison
in their own pockets," and therefore can purge themselves of the
contempt at any time. In re Nevitt, 117 F. 448, 461 (8th Cir. 1902).
When a court finds that confinement has lost its coercive effect, it
essentially becomes punitive and the contemnor must be released. See,
e.g., Lambert v. Montana, 545 F.2d 87 (9th Cir. 1976); In re
Grand Jury Investigation (Braun), 600 F.2d 420, 423-24 (3d Cir. 1979);
Simkin v. United States, 715 F.2d 34, 36-37 (2d Cir. 1983). To hold
the contemnor longer would violate due process. Lambert, 545 F.2d at
89.
- Although the due process test is easily formulated (i.e., when
incarceration no longer has a coercive effect, it violates due process), the
point at which coercive imprisonment ceases to be coercive and essentially
becomes punitive is not readily discernible. While the courts have not
formulated a bright-line test to determine whether a contemnor has met his
burden of persuasion, it is well settled that a person's insistence that he
will never comply is not sufficient. Lambert, 545 F.2d at 90
(citing Catena v. Seidl, 343 A.2d 744, 747 (N.J. 1975)). "Obviously,
the civil contempt power would be completely eviscerated were a defiant
witness able to secure his release merely by boldly asserting that he will
never comply with the court's order." Braun, 600 F.2d at 425. What
has emerged, therefore, is the requirement that the contemnor bear the
burden of establishing that there is no substantial likelihood that
continued confinement would accomplish its coercive purpose. Id.
(citing Lambert, 545 F.2d at 90-91). Self-serving statements
about present intention not to comply is not persuasive evidence that the
defendants will not change their minds. See Simkin, 715 F.2d at 37
(a contemnor's present intention not to comply does not preclude the
possibility that continued confinement will cause a change of mind).
- A court must make an individualized decision whether there remains a
realistic possibility that continued confinement might cause the contemnor
to comply. In re Crededio, 759 F.2d 589, 592 (7th Cir. 1985). In
making its decision, a court should be mindful that incarceration of
contemnors for civil contempt is premised on the notion that the desire for
freedom, and concomitantly the willingness to comply, increases with the
time spent in prison. Braun, 600 F.2d at 428; In re Martin-
Trigona, 590 F. Supp. 87, 91 (D. Conn. 1984). Courts have not hesitated
to incarcerate civil contemnors for periods greater than a year. See,
e.g., United States v. Lippitt, 180 F.3d 873, 878 (7th Cir. 1999)
(finding incarceration remains coercive after two years); CFTC v.
Armstrong, 284 F.3d 404, 408 (2d Cir. 2002) (upholding continued civil
contempt incarceration after period of more than two years); In re
Lawrence, 279 F.3d 1294 (11th Cir. 2002) (over two years); Chadwick
v. Janecka, 312 F.3d 597 (3d Cir. 2002) (holding no constitutional ban
to incarcerating defendants seven years where defendant has present ability
to comply with order).
(3) Compensatory Fines
- Compensatory fines compensate the party for injuries resulting from the
contemptuous behavior. Gen. Signal Corp. v. Donallco, Inc., 787 F.2d
1376, 1380 (9th Cir. 1986). The amount of compensatory sanctions includes
the actual costs incurred by the moving party. Id. Compensatory
damages may also include the amount of loss sustained by the contumacy.
United States v. Berg, 20 F.3d 304, 311 (7th Cir. 1994). See
also Connolly v. J.T. Ventures, 851 F.2d 930, 932 (7th Cir. 1988)
(holding that the loss due to contempt in a copyright infringement action
may include profits from the sale of the items).
- Actual costs incurred by the moving party include attorneys fees and
costs of attending the contempt hearing. A reasonable hourly rate to award
for fees is the amount "according to the prevailing market rates in the
relevant community." Schwarz v. Sec'y of Health & Human Servs., 73
F.3d 895, 906 (9th Cir. 1995) (citing Blum v. Stenson, 465 U.S. 886,
895 (1984)); see also United States v. City of Jackson, 359 F.3d 727,
733 (5th Cir. 2004) ("When a court awards attorney's fees to the government
as a sanction for an adverse party's improper conduct, [ ] we treat the
hourly rate in the local legal community as a benchmark for determining the
amount of attorney's fees to be imposed."); United States v. Big D
Enters., Inc., 184 F.3d 924, 936 (8th Cir. 1999) (same); Napier v.
Thirty or More Unidentified Fed. Agents, 855 F.2d 1080, 1093 (3d Cir.
1988) (same). The Government may argue that, at a minimum, the Government
should be awarded a rate equal to the rate referenced in the Equal Access to
Justice Act (28 U.S.C. § 2412(d)(2)(A), effective 1996). See
City of Jackson, 359 F.3d at 734. The statutes allows for
adjustments for inflation. The Bureau of Labor Statistics' Consumer Price
Index inflation calculator is listed at the following website:
http://www.bls.gov/cpi/home.htm. See Am. Wrecking Corp. v. Sec'y
of Labor, 364 F.3d 321, 330 (D.C. Cir. 2004).
- Petitions to quash third-party summons
- Certain persons are entitled to bring a judicial proceeding to quash a
summons. A summoned party, whether or not the taxpayer under investigation,
is never entitled to commence an action to contest the validity of an
IRS summons. If he has a good faith reason to refuse compliance, his only
recourse is to wait and defend an enforcement action brought against him by
the Government. It is only the case of a summons issued to a third party
that offers an opportunity for a pre-enforcement challenge, but even then,
not by the summoned third party. If, under Section 7609(a), notice of a
third-party summons is required to be given to any person (including the
taxpayer) identified in the summons, the person receiving such notice (the
"noticee") is entitled, under Section 7609(b)(2) to bring a proceeding to
quash the summons. But certain requirements must be met.
- Requirements
- Section 7609 sets forth several requirements relating to time of filing,
requirement of notice, and location of the suit. The requirements are
jurisdictional: they comprise part of the conditions of the United States'
waiver of sovereign immunity and must be strictly adhered to by the
petitioner. Berman v. United States, 264 F.3d 16, 19 (1st Cir. 2001)
(motion to quash must be filed within 20 days of mailing notice); accord
Faber v. United States, 921 F.2d 1118 (10th Cir. 1990); Stringer v.
United States, 776 F.2d 274 (11th Cir. 1985); Ponsford v. United
States, 771 F.2d 1305, 1309 (9th Cir. 1985). As sovereign immunity
cannot be waived unless the statutory conditions have been met, counsel for
the United States have no authority to disregard or overlook failures to
comply with the requirements of Section 7609. Moreover, although these
requirements are jurisdictional and their absence may be raised at any time
(even on appeal), they should be raised as soon as possible.
- The first requirement is found in Section 7609(b)(2)(A), which provides
that the petition to quash must be filed not later than the 20th day after
the noticee has been given notice. Ponsford, 771 F.2d 1305;
Berman, 264 F.3d 16.[FN7] If that 20th day falls on a weekend or
legal holiday, the last day to file the petition is the next business day.
I.R.C. § 7503.
- Second, Section 7609(b)(2)(B) requires the noticee who petitions to
quash the summons to send by registered or certified mail copies of the
petition to the summoned person and to the office designated by the
Secretary of the Treasury (which is generally, but not always, the issuing
IRS agent). Section 7609(b)(2)(B)'s 20-day service period for petitions to
quash reflects Congress's intent to expedite summons actions and eliminate
frivolous delay so that the actual investigation can proceed.
- The requirements of Fed. R. Civ. P. 4(i) for service upon the United
States and its agencies, corporations, officers, and employees also apply,
which means that copies should be sent by registered or certified mail or
delivered to the United States Attorney for the district, as well as sent by
registered or certified mail to the Attorney General in Washington, D.C.
United States v. Roebuck, 81 A.F.T.R.2d (RIA) 598, 601 (S.D. Iowa
1997) ("Rule 4's service requirements apply to petitioners proceeding under
Section 7609."). Accord Faber v. United States, 69 F. Supp. 2d 965,
967 (W.D. Mich. 1999); Malone v. United States, 77 A.F.T.R.2d (RIA)
1157 (M.D. Ga. 1996); Hartman v. United States, 76 A.F.T.R.2d (RIA)
7856 (M.D. Fla. 1995). If a petition to quash an IRS summons is not served
on the Attorney General and the United States Attorney pursuant to Rule
4(i), it is subject to dismissal. Van Manen v. United States, 838 F.
Supp. 335, 337 (W.D. Mich. 1993) (citing former Rule 4(d)(4)), aff'd on
other grounds by unpublished opinion, 23 F.3d 409 (6th Cir. 1994).
- The United States must be served within the 20 days mandated for mailing
a copy of the petition to the IRS. Wahler v. IRS, 91 A.F.T.R.2d
(RIA) 1731 (W.D.N.C. 2002) (service on United States must be effected within
20 days), aff'd by unpublished opinion, 62 Fed. Appx. 526 (4th Cir.
2003); Norfleet v. United States, 89 A.F.T.R.2d (RIA) 2879 (E.D.N.C.)
(same), aff'd by unpublished opinion, 48 Fed. Appx. 907 (4th Cir.
2002); Strong v. United States, 57 F. Supp. 2d 908, 916 (N.D. Cal.
1999) (same); but see Tilley v. United States, 94 A.F.T.R.2d (RIA)
6942 (M.D.N.C. 2004) (in dictum, magistrate judge indicates 120-day period
of Rule 4(m) applies); Hicks v. United States, 91 A.F.T.R.2d (RIA)
589 (M.D.N.C. 2003) (allowing service within 120 days); Roebuck v. United
States, 81 A.F.T.R.2d (RIA) 598 (S.D. Iowa 1997) (same); Hovind v.
United States, 78 A.F.T.R.2d (RIA) 7663 (dismissal for failure to serve
in 120 days), aff'd by unpublished opinion, 159 F.3d 1359 (1998);
Tulsty v. United States, 871 F. Supp. 299, 300 (E.D. Mich. 1994)
(same).
- Third, pursuant to Section 7609(h), a petition to quash must be filed in
the district where the summoned party "resides or is found." This provision
is a jurisdictional requirement rather than a matter of venue. Deal v.
United States, 759 F.2d 442, 444 (5th Cir. 1985). The statute does not
define "resides or is found" and the meaning of the term has been
interpreted infrequently by the courts. The Ninth Circuit held that the
Nevada district court did not have jurisdiction to hear a petition to quash
a summons issued to a California bank. Fortney v. United States, 59
F.3d 117, 119 (9th Cir. 1995). The Fifth Circuit stated that jurisdiction
is "vested in the district where the summons is to be answered" rather than
"by the location of the taxpayer." Masat v. United States, 745 F.2d
985, 988 (5th Cir. 1984). See also Beck v. United States, 91
A.F.T.R.2d (RIA) 1345 (6th Cir. 2003). The district court in Oregon found
that the statute requires "something more than the Due Process analysis of
minimum contacts" and requires "a physical presence within the forum."
Oldham v. United States, 89 A.F.T.R.2d (RIA) 2095, 2097 (D. Or.
2002). Similarly, a district court in California dismissed a petition to
quash a summons issued to MasterCard International because it did not have
an office in California. Scharringhausen v. United States, 91
A.F.T.R.2d (RIA) 651 (S.D. Cal. 2003).
- Counterclaim for enforcement
- Section 7609(b)(2)(A) permits the Government to file a counterclaim for
enforcement whenever a petition to quash a summons has been filed. Whether
to do so is a strategic decision to be made in consultation with the IRS.
The summoned party may comply with the summons after the petition to quash
the summons is dismissed or denied, without a corresponding order enforcing
the summons. In such cases, a counterclaim for enforcement is unnecessary.
If, on the other hand, there is a possibility that compliance would not
follow, an enforcement order would be binding on the summoned party, whether
or not a named party in the case. I.R.C. § 7609(b)(2)(C) ("the
person summoned shall have the right to intervene ... [and] shall be bound
by the decision in such proceeding (whether or not the person intervenes in
such proceeding)").
C. RESPONSES TO FREQUENT OBJECTIONS AND ARGUMENTS
In addition to claiming that the Government failed to establish the four
Powell requirements, a summoned party or noticee may attempt a
broader attack on a summons's validity. In United States v. Powell,
379 U.S. 48, 58 (1964), the Court explained that in a summons enforcement
proceeding:
It is the court's process which is invoked to enforce the administrative
summons and a court may not permit its process to be abused. Such an abuse
would take place if the summons had been issued for an improper purpose,
such as to harass the taxpayer or to put pressure on him to settle a
collateral dispute, or for any other purpose reflecting on the good faith of
the particular investigation.
The taxpayer may "challenge the summons on any appropriate
ground." United States v. Freedom Church, 613 F.2d 316, 319 (1st
Cir. 1979) (citations omitted & emphasis added). The court is faced with the
task of balancing the interests of the taxpayer and the Government. "On one
hand is the Government's interest in summary proceedings designed to
expedite tax collection. On the other hand is the taxpayer's right to
protection from the improper use of the Internal Revenue Service's
summons powers." United States v. Stuckey, 646 F.2d 1369, 1373 (9th
Cir. 1981) (emphasis added).
In addition to broadside attacks challenging the propriety of the
summons, what follows are responses to typical arguments challenging the
validity of a summons.
- IRS failed to follow administrative requirements
- Taxpayers often argue that a court should not enforce a summons, or
should quash a summons to a third party, because the IRS failed to follow
appropriate procedures, including failure to properly issue, serve, or give
notice of the summons. In effect, such taxpayers are arguing that the
fourth requirement of the Powell requirements has not been met.
(See Section II(B)(2)(a)(4).)
- Even if all the administrative steps required by the Code were not
followed, a court may order enforcement of the summonses. Several courts
have held that not every failure to follow an administrative requirement
imposed by the Code necessitates denial of enforcement. See
Mimick v. United States, 952 F.2d 230, 231-32 (8th Cir. 1991). In
the words of the Fifth Circuit:
Nothing in the language of the code itself mandates this sanction [denial of
enforcement] for infringement [of the Code's administrative requirements].
The correct approach for determining whether to enforce a summons requires
the court to evaluate the seriousness of the violation under all the
circumstances including the Government's good faith and the degree of harm
imposed by the unlawful conduct.
United States v. Payne, 648 F.2d 361, 363 (5th Cir. 1981),
(quoting United States v. Bank of Moulton, 614 F.2d 1063,
1066 (5th Cir. 1980)).
- Challenges to the issuance of the summons
- One of the most common challenges to summons enforcement is to the
official's authority to issue the summons. Section 7602(a) provides summons
authority to the "Secretary," meaning "the Secretary of the Treasury or his
delegate." I.R.C. § 7701(a)(11)(B). "Delegate," in turn, is defined
as "any officer, employee, or agency of the Treasury Department duly
authorized by the Secretary of the Treasury directly, or indirectly by one
or more redelegations of authority, to perform the function mentioned or
described in the context." I.R.C. § 7701(a)(12)(A)(i).
- The Secretary of the Treasury has delegated authority to issue summonses
to the Commissioner of the IRS. Treas. Reg. § 301.7602-1(b)
(authorizing the Commissioner of the IRS to issue summonses under I.R.C.
§ 7602); Treas. Reg. §301.7701-9(b) (Treasury regulations
authorizing the Commissioner to perform some function "shall constitute a
delegation by the Secretary of the authority to perform such function").
The Secretary has authorized the Commissioner to redelegate this authority
to IRS employees. Treas. Reg. § 301.7701-9(c). The Commissioner
has redelegated this authority. Deleg. Order No. 4 (Rev. 22), 1997 WL
33479254 (delegating from Commissioner to various IRS employees, including
revenue agents, authority to issue summonses).
- The Supreme Court and the courts of appeal have recognized that the
Secretary's authority to issue summonses has been delegated to the IRS and
its employees. See, e.g., United States v. Arthur Young & Co., 465
U.S. 805, 814 (1984) ("[ a]s a tool of discovery, the § 7602
summons is critical to the investigative and enforcement functions of the
IRS"); United States v. Ins. Consultants of Knox, Inc., 187 F.3d 755,
759 (7th Cir. 1999) ("[t]he IRS is authorized to issue summonses" pursuant
to I.R.C. § 7602); Holifield v. United States, 909 F.2d
201, 205 (7th Cir. 1990) ("The information-gathering authority granted to
the IRS under § 7602 is quite broad."). Challenges to this delegation
have been dismissed as lacking merit. United States v. Derr, 968
F.2d 943, 947 (9th Cir. 1992) (rejecting argument that IRS agents did not
have delegated authority to issue summonses); United States v.
Saunders, 951 F.2d 1065, 1067 (9th Cir. 1991) (same for summons issued
by IRS Revenue Officer); Lonsdale v. United States, 919 F.2d 1440,
1445, 1448 (10th Cir. 1990) (failure to publish Treasury Department orders
delegating authority did not deprive the IRS of authority to issue
summons).
- Challenges to service of the summons
- Section 7603 provides that an IRS summons "shall be served ... by an
attested copy delivered in hand to the person to whom it is directed or left
at his last and usual place of abode." United States v. Bichara, 826
F.2d 1037 (11th Cir. 1987) (proper service of a summons to a taxpayer does
not require that the IRS leave the summons with some person of suitable age
and discretion). Service "in hand" of an officer of a corporate taxpayer,
including a managing agent, is sufficient to effect service on a foreign
corporation. United States v. Toyota Motor Co., 569 F. Supp. 1158
(C.D. Cal. 1983).
- The same IRS agent or officer may both issue and serve a summons
pursuant to Sections 7602 and 7603. United States v. Crum, 288 F.3d
332, 334 (7th Cir. 2002); Derr, 968 F.2d at 946-47; United States
v. McCoy, 954 F.2d 1000, 1001 (5th Cir. 1992); Bichara, 826 F.2d
at 1038; United States v. Howard, 360 F.2d 373, 375 (3d Cir.
1966).
- Objections to defects in service of a summons to a third-party
recordkeeper may only be raised by the summoned party; the taxpayer has no
standing to assert objections to a summons that are personal to the
third-party recordkeeper. Wright v. United States, 964 F. Supp. 336
(M.D. Fla.), aff'd without opinion, 132 F.3d 1461 (11th Cir.
1997).
- Challenges to the adequacy of the notice of the
summons
- While the procedural requirements of Section 7603 for serving the person
named in the summons must be strictly observed, a failure to strictly comply
with the taxpayer notice requirements of I.R.C. § 7609 does not
necessarily warrant the quashing of third-party summonses. United States
v. Hamilton Fed. Sav. & Loan Ass'n, 566 F. Supp. 755, 758 (E.D.N.Y.
1983). The sufficiency of the notice to the taxpayer must be judged by
different standards since its only purpose is to apprise the notice of an
event that has already occurred. Id., citing R. Fink, Tax
Fraud—Audit Investigations, Prosecutions, Vol. 1 § 7.05[2] at
7-53 (MB 1981).
- To evaluate the seriousness of the facial defects, the court looks to
all of the circumstances, including the Government's good faith and the
prejudicial effect to the taxpayer. Bank of Moulton, 614 F.2d at
1066 (failure to list addresses of third parties is not prejudicial);
Tarplay v. United States, 86 A.F.T.R.2d (RIA) 5833 (S.D.N.Y. 2000);
United States v. Hamilton Fed. Sav. & Loan Ass'n, 566 F.Supp. at 758
(failure of the summons to properly list address of taxpayer on summons not
prejudicial); Int'l Bus. Enters. v. United States, 75 A.F.T.R.2d
(RIA) 2237 (S.D. Cal. 1995) (third- party summons will be enforced if agent
makes good-faith effort to deliver a copy to taxpayer's last-known address,
even though agent used the wrong address, if taxpayer actually receives
notice).
- Courts have enforced summonses despite defects in the timing of the
notice to taxpayers. See Cook v. United States, 104 F.3d 886 (6th
Cir. 1997) (holding that district courts possess discretionary authority to
excuse the Service's technical notice errors where the party in interest
suffered no actual prejudice); Sylvestre v. United States, 978 F.2d
25 (1st Cir. 1992) (affirming district courts refusal to quash summonses in
which taxpayer was served 21 days before the date fixed for examination of
records, where taxpayer had opportunity to intervene and seek to quash the
summons); Rivera v. Chase Manhattan Bank, 53 A.F.T.R.2d (RIA) 1364
(S.D.N.Y. 1984) (absent harm to petitioner, summonses, notices of which were
given to petitioner 18 and 22 days before the date set for examination,
would not be quashed); Holifield v. United States, 677 F. Supp. 996,
998 (E.D. Wis. 1987) (although summons required third party to produce
records 11 days after service of summons, in view of the fact that (a) the
IRS later extended the date for production, (b) the plaintiff was able to
move to quash, and (c) the records had not yet been produced, the plaintiff
had not been harmed and the summons would be enforced).
- Section 7603 requires that the IRS provide an attested copy of the
summons to the summoned party. The majority of courts have held that the
IRS need not provide an attested copy to noticees. Kondik v. United
States, 81 F.3d 655, 657 (6th Cir. 1996) ("we hold that § 7609
requires only that taxpayers be served with copies, not attested copies");
Fortney v. United States, 59 F.3d 117, 120 (9th Cir. 1995) (finding
that the absence of an express attestation requirement in Section 7609 is
dispositive of Congress's intent); Codner v. United States, 17 F.3d
1331, 1334 (10th Cir. 1994) ("Congress did not intend to require that notice
copies of summonses served on taxpayers be attested."); Darland v. United
States, 921 F. Supp. 316 (D. Md. 1996). In the Eighth Circuit, however,
the court held in Mimick, 952 F.2d at 231-32 that attested copies
must be served on both the summoned party and any noticees.
- Other Arguments
- Taxpayers have from time to time unsuccessfully alleged other procedural
defects:
- In issuing summonses, the IRS is not required to comply with
procedural safeguards established by the Justice Department
with respect to issuing grand jury subpoenas to attorneys.
Holifield, 909 F.2d at 205.
- There is no statute of limitations on enforcement of a
summons. Being lulled and rudely awakened is not the kind of
harm that allows laches to be used to deprive a plaintiff of
his rights. United States v. Admin. Enters., Inc., 46
F.3d 670 (7th Cir. 1995).
- The IRS is not required to complete a substitute for return
prior to the issuance of a summons. Tarplay v. United
States, 86 A.F.T.R.2d (RIA) 5833 (S.D.N.Y. 2000).
- No OMB control number is required for a summons. Alford v.
United States, 90 A.F.T.R.2d (RIA) 7034 (N.D. Tex. 2002).
- The summons seeks information that the summoned party has
a legal duty not to reveal
- A frequently encountered defense is that the summons calls for
privileged documents or testimony. Only those privileges recognized under
federal law, however, will be considered. United States v. Zolin, 491
U.S. 554, 562 (1989).
- Attorney-client privilege
- Summonses are "subject to the traditional privileges and limitations,"
including attorney-client privilege. Upjohn Co. v. United States, 449
U.S. 383, 398 (1981). The attorney- client privilege encourages "full and
frank communication between attorneys and their clients and thereby
promote[s] broader public interests in the observance of law and
administration of justice." Upjohn, 449 U.S. at 389. Protecting the
privilege, however, comes at a significant cost to the truth- seeking
function of the adversarial system. Zolin, 491 U.S. at 561-63.
"However, since the privilege has the effect of withholding relevant
information from the fact-finder, it applies only where necessary to achieve
its purpose." Fisher v. United States, 425 U.S. 391, 403 (1976).
- A claim of attorney-client privilege will only be upheld: (1) where
legal advice of any kind is sought (2) from a professional legal adviser in
his capacity as such, (3) the communications relating to that purpose, (4)
made in confidence (5) by the client, (6) are at his instance permanently
protected (7) from disclosure by himself or by the legal adviser, (8) except
the protection be waived. See, e.g., United States v. Evans,
113 F.3d 1457, 1461 (7th Cir. 1997) (quoting 8 John Henry Wigmore,
Evidence in Trials at Common Law § 2292 (McNaughton rev.
1961)). The party asserting the privilege bears the burden of establishing
each of the necessary elements. Id. at 1461; United States
v. Powell, 379 U.S. 48, 58 (1964).
- Blanket assertions of privilege are unacceptable: Colton v. United
States, 306 F.2d 633, 639 (2d Cir. 1962); United States v. El Paso
Co., 682 F.2d 530, 541 (5th Cir. 1982). Claims of privilege must be made
and sustained on a question-by- question and document-by-document
basis.
(1) Elements of the attorney-client privilege
(i) "Where legal advice of any kind is sought." It is
essential that the advice in question be "legal." Business
advice is not covered by the privilege. See, e.g.,
Sedco Int'l, S.A. v. Cory, 683 F.2d 1201 (8th Cir. 1982);
Teltron, Inc. v. Alexander, 132 F.R.D. 394 (E.D. Pa.
1990); Coleman v. Am. Broad. Cos., 106 F.R.D. 201, 205-06
(D.D.C. 1985). Nor is the preparation of a tax return legal
advice. See, e.g., United States v. Frederick, 182
F.3d 496 (7th Cir. 1999).
(ii) "From a professional legal adviser in his capacity as
such." It is not enough that a communication be made by or
to a lawyer. For the privilege to apply, the lawyer must be
performing services or giving advice in his capacity as a lawyer.
Evans, 113 F.3d at 1463. The following is a list of some
occasions when the privilege has been held not to apply:
- If one consults with an attorney, not as a lawyer, but as a
friend or as a business advisor, the consultation is not
privileged. In re Lindsey, 158 F.3d 1263, 1270 (D.C.
Cir. 1998); Sedco Int'l, 683 F.2d 1201; Colton,
306 F.2d at 638.
- There is no privilege if the advisor is not an attorney,
unless the Section 7525 privilege, discussed below, applies.
(See Section II(C)(2)(b).)
While there is no
federal accountant's privilege as such, Couch v. United
States, 409 U.S. 322, 335 (1973), there may be
circumstances in which the privilege will extend to an
accountant hired by an attorney to assist in his
representation of the client. Compare United States v.
Kovel, 296 F.2d 918 (2d Cir. 1961), with Cavallaro v.
United States, 284 F.3d 236 (1st Cir. 2002), and
United States v. Ackert, 169 F.3d 136 (2d Cir.
1999).
- When an attorney is acting as a mere scrivener the privilege
does not apply. See Canaday v. United States,
354 F.2d 849, 857 (8th Cir. 1966) (attorney prepares tax
returns); Pollock v. United States, 202 F.2d 281, 286
(5th Cir. 1953) ("transaction involves a simple transfer of
title to real estate and there is no consultation for legal
advice").
- An attorney who acts as his client's agent for receipt or
disbursement of money or property to or from third parties is
not acting in a legal capacity, and records of such
transactions are not privileged. In re Grand Jury
Subpoena, 831 F.2d 225, 228 (11th Cir. 1987);
Morgan v. United States, 380 F.2d 686, 693 (9th Cir.
1967). See United States v. Wells, 929 F. Supp. 423
(S.D. Ga. 1996) (enforcing summons to attorney for trust
account documents concerning real estate transactions of
client).
- Bank records of receipts and disbursements in lawyers' trust
accounts are not privileged communications. McClary v.
Walsh, 202 F.R.D. 286 (N.D. Ala. 2000).
(iii) "The communications relating to that purpose."
"The privilege only protects disclosure of communications; it
does not protect disclosure of the underlying facts by those who
communicated with the attorney ...." Upjohn, 499 U.S.
at 395-96. Thus, documents do not become cloaked with the
attorney-client privilege by being passed from client to lawyer,
Fisher, 425 U.S. at 403-04, and the information that a
person furnishes an attorney for the purpose of preparing his tax
return is not privileged. United States v. Lawless, 709
F.2d 485, 488 (7th Cir. 1983).
- Matters such as the client's identity, engagement letter, retainer
agreement, or fees are generally not privileged. See, e.g., United
States v. BDO Seidman, 337 F.3d 802, 811 (7th Cir. 2003) (client
identity); United States v. Leventhal, 961 F.2d 936 (11th Cir. 1992)
(fees); United States v. Blackman, 72 F.3d 1418 (9th Cir. 1995);
United States v. Abrahams, 905 F.2d 1276, 1283 (9th Cir. 1990) (names
of tax preparer attorney's clients and his fees were not confidential
communications protected by the attorney-client privilege with respect to
IRS summons); Lefcourt v. United States, 125 F.3d 79 (2d Cir.
1997); United States v. Ritchie, 15 F.3d 592 (6th Cir. 1994) (same);
Chaudhry v. Gallerizzo, 174 F.3d 394, 402 (4th Cir. 1999); Clarke
v. Am. Commerce Nat'l Bank, 974 F.2d 127, 129 (9th Cir. 1992); but
see United States v. Liebman 742 F.2d 807 (3d Cir. 1984) (holding
IRS could not summons names of clients lawyer had advised could take certain
deductions).
- Billing records which reveal the substance of confidential discussions
between attorney and client, may be privileged. In re Walsh, 623 F.2d
489, 494-95 (7th Cir. 1980). The attorney-client privilege applies to
correspondence between attorney and client which reveals the client's
motivation for creation of the relationship, as well as bills, ledgers, time
records and other documents which reveal the nature of the services
provided. In re Grand Jury Witness, 695 F.2d 359, 362 (9th Cir.
1982).
- To the general rule that a client's identity and the nature of his fee
arrangement with his attorney are not privileged, some courts have
recognized a limited exception "where disclosure would ... constitute the
'last link' in an existing chain of evidence likely to lead to the client's
indictment." Blackman, 72 F.3d at 1424; see also In re Grand Jury
Proceedings, 517 F.2d 666 (5th Cir. 1975). But the last link doctrine
has not met with universal acceptance, see, e.g., Ritchie, 15 F.3d at
602, n.13 ("our circuit has expressly rejected the last link doctrine"),
and, even in circuits that have adopted it, it will not necessarily apply to
prevent enforcement of an IRS summons, see Leventhal, 961 F.2d at
940-41.
(iv) "Made in confidence." There must be an expectation
of confidentiality for the communication to be privileged. If
the matter is not intended to remain confidential but is, for
example, to be disclosed on a tax return, it is not privileged.
See Colton, 306 F.2d at 637; In re Grand Jury
Proceedings, 727 F.2d 1352, 1356 (4th Cir. 1984) (collecting
cases). Documents transmitted to an attorney with the intent
that the information will be transmitted to a third party
(e.g., documents needed for real estate closings and
business transactions) are not protected by the attorney-client
privilege. Chevron Corp. v. Pennzoil Co., 974 F.2d 1156,
1162 (9th Cir. 1992) (citing Weil v. Inv./Indicators, Research
& Mgmt., 647 F.2d 18, 24 (9th Cir. 1981); Lawless, 709
F.2d at 487.
(v) "By the client." In order to be privileged,
communications must be made by the client. Communications made
by someone other than the client, even if made for the benefit of
the client and even if very helpful to the attorney in rendering
legal advice, are not privileged. Ackert, 169 F.3d at
138 ("[A] communication between an attorney and a third party
does not become shielded by the attorney-client privilege solely
because the communication proves important to the attorney's
ability to represent the client."); In re G-I Holdings
Inc., 218 F.R.D. 428, 436 (D.N.J. 2003) (same). When the
client is not an individual but a legal entity, such as a
corporation, a court must determine which individual's
communications with corporate counsel will be protected. This
determination is made case by case, with an eye to identifying
those persons who (1) need to obtain legal advice to perform
their job and guide the corporate decision-making, and (2) are
likely to have factual knowledge which the lawyer needs to know
to give the best legal advice. Upjohn, 449 U.S. at 391-
96.
(vi) "Are at his instance permanently protected." See
Swidler & Berlin v. United States, 524 U.S. 399 (1998)
(holding that the attorney-client privilege survives the death of
a client, unless some other exception to the privilege
applies).
(vii) "From disclosure by himself or by the legal
adviser." An attorney need not produce documents that his
client could not be compelled to produce. Fisher, 425
U.S. at 403-05. ("Since each taxpayer transferred possession of
the documents in question from himself to his attorney in order
to obtain legal assistance in the tax investigations in question,
the papers, if unobtainable by summons from the client, are
unobtainable by summons directed to the attorney by reason of the
attorney-client privilege.").
(viii) "Except the protection be waived." In general,
only the client can waive the attorney-client privilege, as the
privilege "belongs solely to the client." In re von
Bulow, 828 F.2d 94, 100-01 (2d Cir. 1987). An exception
exists in some states which allows the personal representative of
a decedent to waive the privilege in certain circumstances.
Swidler & Berlin, 524 U.S. at 404 n.2. In the case of a
corporate client, officers and directors control the privilege,
which can be raised or waived. That authority, even with respect
to past communications, passes to a trustee in bankruptcy who can
choose to waive the privilege in light of his fiduciary duties to
creditors and shareholders. CFTC v. Weintraub, 471 U.S.
343, 358 (1985).
(2) Express Waiver
- Generally, disclosure of confidential communications or attorney work
product to a third party constitutes a waiver of privilege as to those
items. See Genentech, Inc. v. United States Int'l Trade Comm'n, 122
F.3d 1409, 1414 (Fed. Cir. 1997); Carter v. Gibbs, 909 F.2d 1450,
1451 (Fed. Cir. 1990) (en banc); Clady v. County of Los Angeles, 770
F.2d 1421, 1433 (9th Cir. 1985); United States v. MIT 129 F.3d 681
(1st Cir. 1997). Once the attorney-client privilege has been waived, the
privilege is generally lost for all purposes and in all forums.
Genentech, 122 F.3d at 1416. Voluntary disclosure of a privileged
document waives the attorney-client privilege with respect to all
communications on the same subject matter. Weil, 647 F.2d at 24;
Golden Valley Microwave Foods, Inc. v. Weaver Popcorn Co., 132 F.R.D.
204, 207-08 (N.D. Ind. 1990); Standard Chartered Bank, PLC v. Ayala Int'l
Holding, Inc., 111 F.R.D. 76, 85 (S.D.N.Y. 1986).
(3) Implied Waiver
- A party may waive the attorney-client privilege by asserting claims or
defenses that put his or her attorney's advice at issue in the litigation.
Rhone-Poulenc Rorer, Inc. v. Home Indem. Co., 32 F.3d 851, 863 (3d
Cir. 1994). See Chevron, 974 F.2d 1156 (party's claim that its tax
position was reasonable because it was based on advice of counsel puts
advice at issue and waives privilege). Common factors in finding implied
waiver are (1) assertion of the privilege is a result of an affirmative act;
(2) through the affirmative act, the asserting party has placed the
protected information at issue by making it relevant; and (3) application of
privilege would deny the opposing party access to information vital to its
defense. Hearn v. Rhay, 68 F.R.D. 574 (E.D. Wash. 1975).
- The doctrine of waiver by implication reflects the position that the
attorney-client privilege may not be used as both a sword and a shield.
Chevron, 974 F.2d at 1162; In re Bilzerian, 926 F.2d 1285,
1292 (2d Cir. 1991); In re von Bulow, 828 F.2d at 103. In other
words, "[a] defendant may not use the privilege to prejudice his opponent's
case or to disclose some selected communications for self-serving purposes."
Bilzerian, 926 F.2d at 1292; accord United States v. Jones,
696 F.2d 1069, 1072 (4th Cir. 1982) ("Selective disclosure for tactical
purposes waives the privilege.").
- Where a waiver has been found, the courts have taken at least three
different approaches in defining the scope of the waiver:
- The scope of the waiver only extends to the specific documents
produced: Prudential Ins. Co. v. Turner & Newall, PLC,
137 F.R.D. 178, 182 (D. Mass. 1991); Parkway Gallery
Furniture, Inc. v. Kittinger/Pa. House Group, Inc., 116
F.R.D. 46, 52 (M.D.N.C. 1987); Int'l Digital Sys. Corp. v.
Digital Equip. Corp., 120 F.R.D. 445, 446 (D. Mass.
1988).
- The scope of the waiver encompasses all privileged materials
on the same subject matter as the produced documents:
Standard Chartered Bank, 111 F.R.D. at 85; Perrignon
v. Bergen Brunswig Corp., 77 F.R.D. 455, 461 (N.D. Cal.
1978); Goldman, Sachs & Co. v. Blondis, 412 F. Supp.
286, 289 (N.D. Ill. 1976).
- The scope of the waiver includes all privileged documents
relating to the same subject matter as the produced
documents: In re Sealed Case, 877 F.2d 976, 977 (D.C.
Cir. 1989).
(4) Selective Waiver
- In Diversified Indus., Inc. v. Meredith, 572 F.2d 596 (8th Cir.
1977) (en banc), the Eighth Circuit held that the corporate defendant had
not waived the attorney-client privilege when it disclosed to the SEC
certain memoranda and other documents prepared by special outside counsel
who had been retained to investigate certain practices of the company's
personnel. The court of appeals concluded that only a "limited" waiver had
occurred, thereby giving rise to what has come to be called the "selective"
waiver doctrine. As its only reason for its conclusion, the court stated
that "[t]o hold otherwise may have the effect of thwarting the developing
procedure of corporations to employ independent outside counsel to
investigate and advise them in order to protect stockholders, potential
stockholders and customers." Id. at 611.
- The doctrine has not achieved much traction, as most courts have refused
to apply it. See, e.g., In re Columbia/HCA Healthcare Corp.,
293 F.3d 289, 302 (6th Cir. 2002) ("we reject the concept of selective
waiver, in any of its various forms"); MIT, 129 F.3d 681 (disclosure
normally negates the privilege); Dellwood Farms, Inc. v. Cargill,
Inc., 128 F.3d 1122, 1126 (7th Cir. 1997) ("The cases ... generally
reject a right of 'selective' waiver, where, having voluntarily disclosed
privileged information to one person, the party who made the disclosure
asserts the privilege against another person who wants the
information."); Genentech, 122 F.3d 1409 (rejecting selective waiver
doctrine to allegedly inadvertent disclosure); In re Steinhardt Partners,
LP, 9 F.3d 230 (2d Cir. 1993) (refusing to apply selective waiver
doctrine to voluntary disclosure of work product to SEC);
Westinghouse Elec. Corp. v. Republic of the Philippines, 951 F.2d
1414 (3d Cir. 1991) (rejecting application of selective waiver doctrine);
In re Martin Marietta Corp., 856 F.2d 619 (4th Cir. 1988) (same);
Permian Corp. v. United States , 665 F.2d 1214, 1220 (D.C. Cir. 1981)
(finding selective waiver theory "wholly unpersuasive"); but see United
States v. Bergonzi, 403 F.3d 1048, 1050 (9th Cir. 2005) (per curiam)
("Whether the sort of selective waiver McKesson seeks is available in this
Circuit is an open question.") (citing Bittaker v. Woodford, 331 F.3d
715, 720 n.5 (9th Cir. 2003) (en banc) ("[T]he law [regarding selective
waiver] is not ... settled.")).
- The Tax Division's view has been that selective waiver would extend the
privilege beyond its intended purpose of encouraging full disclosure to
one's attorney in order to obtain informed legal assistance. In MIT,
129 F.3d 681, the Tax Division successfully contended that MIT had forfeited
attorney-client privilege and work-product protection for documents that had
been disclosed to the Defense Contract Audit Agency. MIT thus had to turn
over the documents in response to an IRS summons.
(5) Inadvertent Waiver
- A voluntary disclosure of information that is inconsistent with the
confidential nature of the attorney-client relationship waives the
privilege. Alldread v. City of Grenada, 988 F.2d 1425, 1434 (5th
Cir. 1993). There is no consensus, however, as to the effect of inadvertent
disclosure. Some courts hold that where there has been a disclosure of
privileged communications to third parties, the privilege is lost, even if
the disclosure is unintentional or inadvertent. See In re Sealed
Case, 877 F.2d at 980; In re Grand Jury Proceedings, 727 F.2d at
1356.
- The majority of courts, while recognizing that inadvertent disclosure
may result in a waiver of the privilege, have incorporated an approach which
takes into account the facts surrounding a particular disclosure.
Alldread, 988 F.2d at 1434. Courts generally apply the following
factors in determining whether inadvertent disclosure should be treated as a
waiver of attorney-client privilege:
the reasonableness of the precautions to prevent inadvertent disclosure, the
time taken to rectify the error, the scope of the discovery and the extent
of the disclosure. There is, of course, an overreaching issue of fairness
and the protection of an appropriate privilege which, of course, must be
judged against the care or negligence with which the privilege is
guarded.
Lois Sportswear, USA, Inc. v. Levi Strauss & Co. 104
F.R.D. 103, 105 (S.D.N.Y. 1985); Dellwood Farms, 128 F.3d
at 1127.
- The ABA has issued an opinion stating that a lawyer who receives
materials that on their face appear to be subject to the attorney-client
privilege or otherwise confidential, under circumstances where it is clear
that they were not intended for the receiving lawyer, should refrain from
examining the materials, notify the sending lawyer and abide the
instructions of the lawyer who sent them. ABA Comm. on Ethics and Prof'l
Responsibility, Formal Op. 368 (1992). An attorney who receives such
materials should confer with his or her supervisor.
(6) Crime Fraud Exception
- The attorney-client privilege does not extend to communications "in
furtherance of intended or present continuing illegality." In re Grand
Jury Proceedings, 87 F.3d 377, 381 (9th Cir. 1996); United States v.
Jacobs, 117 F.3d 82, 87 (2d Cir. 1997). When a client abuses the system
by consulting an attorney for the purpose of furthering criminal or
fraudulent activity, the application of the attorney-client privilege is
overcome by the "crime-fraud exception" and such information loses its
protected status. Zolin, 491 U.S. at 561-63. See also
Clark v. United States, 289 U.S. 1 (1933). In such
circumstances, the value to society of encouraging attorney-client
communications is outweighed by "the costs of probative evidence foregone."
In re Grand Jury Proceedings (Violette), 183 F.3d 71, 76 (1st
Cir. 1991).
- The party seeking application of the crime-fraud exception to overcome
the attorney-client privilege must make the following prima facie
showing:
(1) that the client was engaged in (or was planning) criminal
or fraudulent activity when the attorney-client communications
took place; and
(2) that the communications were intended by
the client to facilitate or conceal the criminal or fraudulent activity.
Violette, 183 F.3d at 75 (emphasis in original). The
exception applies not only where the client actually knows that
the contemplated activity is illegal, but also where the client
"reasonably should have known." United States v.
Rakes, 136 F.3d 1, 4 (1st Cir. 1998). Moreover, whether the
attorney knew about or was complicit in the illegal activity has
no bearing on the crime-fraud determination. See
United States v. Reeder, 170 F.3d 93, 106 (1st Cir.),
cert. denied, 528 U.S. 872 (1999); In re Grand Jury
Investigation, 842 F.2d 1223, 1226 (11th Cir. 1987);
Jacobs, 117 F.3d at 87. The moving party must also
establish "some relationship between the communications at issue
and the alleged offense." Sound Video Unlimited, Inc. v.
Video Shack, Inc., 661 F. Supp. 1482, 1486 (N.D. Ill. 1987).
Prima facie evidence is a "lax standard." In re Feldberg,
862 F.2d 622, 626 (7th Cir. 1988).
- To determine whether the crime-fraud exception applies, the court may
conduct an in camera review of the alleged communications. "[A] lesser
evidentiary showing is needed to trigger in camera review than is
required to ultimately overcome the privilege." Zolin, 491 U.S. at
572.
Once that showing is made, the decision whether to engage in in camera
review rests in the sound discretion of the district court. The court
should make that decision in light of the facts and circumstances of the
particular case, including, among other things, the volume of materials the
district court has been asked to review, the relative importance to the case
of the alleged privileged information, and the likelihood that the evidence
produced through in camera review, together with other available
evidence then before the court, will establish that the crime-fraud
exception does apply.
Id.
- Whether or not there has been an in camera review, the district court
exercises its discretion again to determine whether the facts are such that
the crime-fraud exception applies. Jacobs, 117 F.3d at 87. Mere
allegations or suspicion by the Government are insufficient. But proof
beyond a reasonable doubt is not necessary to justify application of the
crime-fraud exception. The test for invoking the crime-fraud exception to
the attorney-client privilege is whether there is "reasonable cause to
believe that the attorney's services were utilized in furtherance of the
ongoing unlawful scheme." Reasonable cause is more than suspicion but less
than a preponderance of evidence. In re Grand Jury Proceedings, 87
F.3d at 381 (9th Cir. 1996) (citation omitted).
- The crime-fraud exception is not limited to traditional criminal
activities; the crime-fraud exception has been applied to civil fraud, as
well as criminal fraud. See United States v. Ballard, 779 F.2d 287
(5th Cir. 1986) (communications relating to a fraudulent conveyance and
scheme to conceal assets from bankruptcy court are not protected by the
attorney-client privilege); United States v. Barrier Indus., Inc.,
1997 WL 16668 (S.D.N.Y. 1997); In re Rigby, 199 B.R. 358 (E.D. Tex.
1995) (crime-fraud exception applies to communications in furtherance of
scheme to partition property to avoid IRS lien; exception applies to
work-product privilege as well).
- Tax Practitioner privilege—§ 7525
- Prior to the Internal Revenue Service Restructuring and Reform Act of
1998, Pub. L. No. 105-206, 112 Stat. 685, the attorney- client privilege was
limited to a communication between a client and her lawyer. And the Supreme
Court had ruled in Couch, 409 U.S. at 335, that "no confidential
accountant-client privilege exists under federal law, and no state-created
privilege has been recognized in federal cases." So things stood until
1998, when Congress added Section 7525 to the Code.
- With respect to communications made on or after July 22, 1998, Section
7525(a)(1) provides that "[w]ith respect to tax advice, the same common law
protections of confidentiality which apply to a communication between a
taxpayer and an attorney shall also apply to a communication between a
taxpayer and any federally authorized tax practitioner to the extent the
communication would be considered a privileged communication if it were
between a taxpayer and an attorney." A "federally authorized tax
practitioner" is "any individual who is authorized under Federal law to
practice before the Internal Revenue Service if such practice is subject to
Federal regulation under section 330 of title 31, United States Code."
I.R.C. § 7525(a)(3)(A). "Tax advice" is defined as "advice given
by an individual with respect to a matter which is within the scope of the
individual's authority to practice [before the IRS]." I.R.C. §
7525(a)(3)(B).
- Section 7525 only "protects communications between a taxpayer and a
federally authorized tax practitioner 'to the extent the communication would
be considered a privileged communication if it were between a taxpayer and
an attorney.'" Frederick, 182 F.3d at 502 (quoting I.R.C.
§ 7525(a)(1)). The scope of the Section 7525 privilege is thus no
broader than that of the attorney-client privilege and is subject to all the
limitations and restrictions imposed on the attorney-client privilege at
common law. For example, the Conference Committee report notes that the
Section 7525 privilege may be waived by disclosure to third parties in the
same way as is true of the attorney-client privilege. H.R. Conf. Rep. No.
105-599, at 267 (1998), reprinted in 1998-3 C.B. 755, 1023.
- The Section 7525 privilege is subject to special statutory limitations
that otherwise make it significantly narrower than the attorney-client
privilege. The privilege, such as it is, may only be asserted in any
noncriminal tax matter before the IRS and in any noncriminal
tax proceeding in Federal court brought by or against the United States.
I.R.C. § 7525(a)(2). As a consequence, it is not available in
response to a summons issued by an IRS special agent pursuing a criminal
investigation. So, too, it is not available in any non- tax matter or
proceeding, whether or not the IRS or the United States is a party. Thus,
it "may not be asserted to prevent the disclosure of information to any
regulatory body other than the IRS." S. Rep. No. 105-174, at 71 (1998),
reprinted in 1998-3 C.B. 537, 607.
- With respect to communications made before October 22, 2004, Section
7525(b) provides that the privilege "shall not apply to any written
communication which is between a federally authorized tax practitioner and
any director, officer, employee, agent, or representative of the person, or
any other person holding a capital or profits interest in the person, and in
connection with the promotion of the direct or indirect participation of the
person in any tax shelter." (Emphasis added.) For these purposes, Section
7525(b) incorporates Section 6662(d)(2)(C)(ii)'s broad definition of the
term "tax shelter" as "(I) a partnership or other entity, (II) any
investment plan or arrangement, or (III) any other plan or arrangement, if a
significant purpose of such partnership, entity, plan, or arrangement is the
avoidance or evasion of Federal income tax."
- With respect to communications made on or after October 22, 2004,
Section 7525(b) was amended by the American Jobs Creation Act of 2004, Pub.
L. No. 108-357, § 813, 118 Stat.1418, 1581, to make the tax
practitioner privilege inapplicable to any written communication in
connection with the promotion of the direct or indirect participation of any
person in such a tax shelter, whether or not the participant is a
corporation.
- Among the cases to consider contentions that the Section 7525 privilege
applied are:
- BDO Seidman, 337 F.3d 802 (applying attorney-client
privilege law to reject claim that a client's identity was a
matter of privilege under Section 7525);
- Scotty's Contracting & Stone, Inc. v. United States,
326 F.3d 785 (6th Cir. 2003) (rejecting suggestion that
Arthur Young is no longer good law in light of Section
7525);
- Doe v. KPMG, LLP, 325 F. Supp. 2d 746 (N.D. Tex. 2004)
(rejecting claim that client identities were privileged under
Section 7525), rev'd on other grounds, 398 F.3d 686
(5th Cir. 2005);
- Doe v. Wachovia Corp., 268 F. Supp. 2d 627 (W.D.N.C.
2003) (finding Section 7525 inapplicable where the United
States was not a party, there was no IRS tax proceeding, and
the tax shelter involved a corporation);
- United States v. KPMG, LLP, 237 F. Supp. 2d 35 (D.D.C.
2002) (finding Section 7525 did not apply to communications
relating to preparation of tax returns).
- Work product
- In general, the work-product doctrine, now embodied in Fed. R. Civ. P.
26(b)(3), provides qualified protection for documents:
prepared in anticipation of litigation or for trial by or for another party
or by or for that other party's representative (including the other party's
attorney, consultant, surety, indemnitor, insurer, or agent) only upon a
showing that the party seeking discovery has substantial need of the
materials in the preparation of the party's case and that the party is
unable without undue hardship to obtain the substantial equivalent of the
materials by other means. In ordering discovery of such materials when the
required showing has been made, the court shall protect against disclosure
of the mental impressions, conclusions, opinions, or legal theories of an
attorney or other representative of a party concerning the
litigation.
- The question whether a document was prepared in anticipation of
litigation is often a difficult factual matter. United States v.
Rockwell Int'l, 897 F. 2d 1255 (3d Cir. 1990). In United States v.
Adlman, 134 F. 3d 1194 (2d Cir. 1998), the Court of Appeals held that a
memorandum prepared by outside accountants analyzing likely IRS challenges
to a corporate reorganization was protected work-product. The court
accepted, without question, the taxpayer's assertion that litigation "was
virtually certain to result" from the proposed transaction if carried out,
because the IRS usually audited the taxpayer's returns, the claimed refund
was so large it would require approval from the Joint Congressional
Committee on Taxation under section 6405, and there was no case or IRS
ruling exactly on point which would validate the transaction. Id. at
1196. The court held that "a document created because of anticipated
litigation, which tends to reveal mental impressions, conclusions, opinions
or theories concerning the litigation, does not lose work-product protection
merely because it is intended to assist in the making of a business decision
influenced by the likely outcome of the anticipated litigation. Id.
at 1195. In the course of its opinion, the Second Circuit rejected what
it viewed as a narrower standard, described as "principal purpose" or
"primarily to assist in" litigation, as opposed to primarily to assist in
making a business decision. See also, In re Grand Jury
Subpoena, 357 F.3d 900, 908 (9th Cir. 2004). In any event, anticipation
of an IRS audit does not amount to anticipation of litigation and a factual
record can be made to establish this point.
- In United States v. Baggot, 463 U.S. 476, 484 (1983), the Supreme
Court held that an IRS civil audit was not "preliminarily to or in
connection with a judicial proceeding" within the meaning of Fed. R. Crim.
P. 6(e)(3)(C)(I). As a result, grand jury transcripts and documents could
not be disclosed for use in the audit. Although the Court noted, 463 U.S.
at 479 n.3, that its decision was limited to Rule 6(e)(3)(C)(I) and that
"[o]ther considerations may govern the construction of similar standards in
other contexts (e.g., Fed. R. Civ. P. 26(b)(3) ('in anticipation of
litigation or for trial'))," its opinion is nonetheless instructive.
- The Court explained the "preliminarily to" requirement as
follows:
[T]he Rule contemplates only uses related fairly directly to some
identifiable litigation, pending or anticipated. Thus, it is not enough to
show that some litigation may emerge from the matter in which the material
is to be used, or even that litigation is factually likely to emerge. The
focus is on the actual use to be made of the material. If the
primary purpose of disclosure is not to assist in preparation or conduct of
a judicial proceeding, disclosure under (C)(i) is not
permitted.
Baggot, 463 U.S. at 480 (emphasis in original). In other
words, a civil tax audit does not in and of itself portend
litigation. The Baggot Court recognized that there are
four possible outcomes of a civil audit, three of which may
involve litigation at some point in the future. Id.
Nevertheless, the Court held that an audit was not
"preliminarily to" litigation:
The fact that judicial redress may be sought, without more, does not
mean that the Government's action is "preliminar[y] to a judicial
proceeding." Of course, it may often be loosely said that the Government's
action is "preparing for litigation," in the sense that frequently it will
be wise for an agency to anticipate the chance that it may be called upon to
defend its actions in court. That, however, is not alone enough to bring an
administrative action within (C)(i). Where an agency's action does not
require resort to litigation to accomplish the agency's present goal, the
action is not preliminary to a judicial proceeding for purposes of
(C)(i).
Id. at 481-82. See also, Culinary Foods, Inc. v.
Raychem Corp., 150 F.R.D. 122, 130 (N.D. Ill. 1993)
(documents prepared during OSHA investigation not in anticipation
of litigation because, in OSHA cases, litigation generally is
contemplated only after the employer refuses to recognize and
correct safety violations).
- While the Supreme Court, with citation to Fed. R. Civ. P. 26(b)(3), has
held that the work-product doctrine protects "material prepared by agents
for the attorney as well as those prepared by the attorney himself"
(United States v. Nobles, 422 U.S. 225, 238-39 (1975)), and applies
to summons enforcement proceedings, Upjohn, 449 U.S. at 398-99, the
Court also has held that there is no work-product immunity for the tax
accrual work papers prepared by an accountant on behalf of a corporation.
See United States v. Arthur Young & Co., 465 U.S. 805, 817 (1984).
(See, Section II.B.2.c.(3).)
Work-product protection turns, in substantial part, on the role of the
person preparing the sought-after document. When an accountant is in the
role of auditor of a public company, his memoranda are not created "because
of" litigation. An outside auditor is performing a very different function
than a business or tax advisor. It is important in each case to set forth a
factual record demonstrating the work done and the role of the document
creator.
- Privilege for work-product, other than the mental impressions of an
attorney, may be overcome with a showing of substantial need. In the summons
enforcement context, a factual record needs to be made to establish the
substantial need for non-opinion work- product. Attorney opinion
work-product, on the other hand, receives special protection by the courts;
it is not available even upon a showing of substantial need. See
Pacamor Bearings, Inc. v. Minebea Co., 918 F. Supp. 491 (D.N.H. 1996)
(attorney opinion work-product distinguished from "ordinary" work-product);
Fraiser v. Southeastern Pa. Transp. Auth., 161 F.R.D. 309 (E.D. Pa.
1995) (same).
- Finally, it must be recalled that while I.R.C. § 7525 creates
a tax practitioner privilege analogous to the attorney- client communication
privilege, it does not create a work- product privilege apart from
that created by Rule 26(b)(3). Frederick, 182 F.3d at 502.
- Overly broad, vague, or burdensome
- As an adjunct to arguments attacking the relevance of summoned
materials, parties resisting enforcement of IRS summonses frequently assert
that summonses are so broad, indefinite, or burdensome as to constitute an
unreasonable search in violation of the Fourth Amendment. To pass
constitutional muster, however, all that is required is that the summons
describe the documents with sufficient particularity and not be excessive
for the purposes of the inquiry. See Oklahoma Press Pub'g Co. v.
Walling, 327 U.S. 186, 209 (1946). "As for specificity, the summons
[need only describe] the requested documents in enough detail to inform [the
summoned party] of exactly what he was to produce." United States v.
Abrahams, 905 F.2d 1276, 1282 (9th Cir. 1990). See also United
States v. Judicial Watch, Inc., 371 F.3d 824, 832 (D.C. Cir. 2004);
United States v. Medlin, 986 F.2d 463, 467 (11th Cir. 1993) ("An IRS
summons is overbroad if it 'does not advise the summoned party what is
required of him with sufficient specificity to permit him to respond
adequately to the summons.'" (quoting United States v. Wyatt, 637
F.2d 293, 302 n.16 (5th Cir. 1981))).
- While the Commissioner's summons authority has been described as a
license to fish, United States v. Luther, 481 F.2d 429, 432-33 (9th
Cir. 1973) ("Sec. 7602 authorizes the Secretary or his delegate 'to fish'");
United States v. Giordano, 419 F.2d 564, 568 (8th Cir. 1969)
("Secretary or his delegate has been specifically licensed to fish by
§ 7602"), this license is not without limit. The IRS may not
conduct an unfettered "fishing expedition" through a person's records, but
"must identify with some precision the documents it wishes to inspect."
United States v. Dauphin Deposit Trust Co., 385 F.2d 129, 131 (3d
Cir. 1967). Thus, in testing for overbreadth, the question is not whether
the summons calls for the production of a large volume of records. Instead,
the questions are rather, first did the summons describe the requested
documents in enough detail to inform the summoned party of exactly what is
to be produced, Abrahams, 905 F.2d at 1282, 1285, and, second, may
the summoned records be relevant to the inquiry. In re Tax Liabs. of
John Does v. United States, 866 F.2d 1015, 1021 (8th Cir. 1989).
Summonses that are definite in nature and finite in scope, and that request
only information that may be relevant to the IRS's inquiry, consistently
have been enforced against challenges for overbreadth. See, e.g., United
States v. Reis, 765 F.2d 1094, 1096 n.2 (11th Cir. 1985); United
States v. Linsteadt, 724 F.2d 480, 483 n.1 (5th Cir. 1984); United
States v. Cmty. Fed. Sav. & Loan Ass'n, 661 F.2d 694 (8th Cir. 1981);
United States v. Nat'l Bank of South Dakota, 622 F.2d 365 (8th Cir.
1980).
- Likewise, the courts have not been receptive to arguments that a summons
may be overly burdensome to the summoned party. It is now well established
that enforcement of a summons seeking relevant records will not be denied
merely because the summons seeks production of (or a search through) a great
many records or will result in significant expenditure of the recordkeeper's
time and money. See, e.g., Judicial Watch, 371 F.3d at 832;
Spell v. United States, 907 F.2d 36, 39 (4th Cir. 1990); United
States v. Berney, 713 F.2d 568, 571-72 (10th Cir. 1983); Luther,
481 F.2d at 432-33; In re Tax Liabs. of John Does, 866 F.2d at 1021
(court rejected employer's claim that the cost of compliance with summons
seeking payroll records for 50 employees was out of proportion to any
revenue that the IRS might obtain); United States v. Southwestern Bank &
Trust Co., 693 F.2d 994, 996 (10th Cir. 1982) (reversing district
court's refusal to enforce fully a summons requiring review of 10 million
documents).
- First Amendment privilege
- The First Amendment to the United States Constitution prohibits the
Government from "abridging the freedom of speech." The Government may
investigate speech, either spoken or written, only if it is outside the
First Amendment's protection.
- Courts may quash IRS administrative summonses that would infringe on
First Amendment rights—either those of the speaker or those of the
speaker's audience. United States v. Trader's State Bank, 695 F.2d
1132 (9th Cir. 1983) (per curiam) (vacating an order of enforcement of an
IRS summons seeking all church banking records as overbroad and an
infringement on the church's First Amendment rights of freedom of
association and freedom of religion); United States v. Citizens State
Bank, 612 F.2d 1091, 1094 (8th Cir. 1980) (holding that the district
court erred in failing to consider First Amendment implications of IRS
summons). The right to speak or write anonymously is an inherent part of
First Amendment freedoms, as are the rights to participate in an
organization, listen to a speaker, or read anonymously. See generally
McIntyre v. Ohio Elections Comm'n, 514 U.S. 334 (1995).
- If the summoned party can make a "prima facie showing of arguable first
amendment infringement," then, before a court will enforce the summons, the
Government must demonstrate "a rational connection between the disclosure
required by the summons and a legitimate governmental end, and must
demonstrate a cogent and compelling governmental interest in the
disclosure." Trader's State Bank, 695 F.2d at 1133. The effect of
this standard is that the IRS summons should be narrowly drafted to avoid
First Amendment implications.
- It is not illegal merely to advocate a false tax theory. See
generally Virginia v. Black, 538 U.S. 343, 358 (2003) ("the First
Amendment 'ordinarily' denies a State 'the power to prohibit dissemination
of social, economic and political doctrine which a vast majority of its
citizens believes to be false and fraught with evil consequence.'") (quoting
Whitney v. California, 274 U.S. 357, 374 (1927)); Texas v.
Johnson, 491 U.S. 397, 414 (1989) ("If there is a bedrock principle
underlying the First Amendment, it is that the government may not prohibit
the expression of an idea simply because society finds the idea itself
offensive or disagreeable.").
- Unless the speech falls into one of three unprotected or less-
protected categories, a court will not permit the Government to restrict or
otherwise interfere with speech. The three categories, which often overlap,
are: (a) false commercial speech, (b) speech that is part of a course of
illegal conduct, and (c) speech that incites others to imminently violate
the law. Ohralik v. Ohio State Bar Ass'n, 436 U.S. 447, 455-56
(1978); Brandenburg v. Ohio, 395 U.S. 444, 448-49 (1969).
(a) The First Amendment does not protect false commercial
speech. Commercial speech is entitled to less protection under
the First Amendment than political speech, and so can more easily
be regulated or enjoined. Virginia State Bd. of Pharmacy v.
Virginia Citizens Consumer Council, Inc., 425 U.S. 748, 771-
72 (1976) (holding that commercial speech is protected by the
First Amendment, but that the Government may regulate false
commercial speech). The Supreme Court has held that the
Government "may ban commercial expression that is fraudulent or
deceptive without further justification." Edenfield v.
Fane, 507 U.S. 761, 768 (1993). Commercial speech, however,
is subject to injunction only if it is false or
misleading; otherwise, it is protected by the First Amendment.
See, e.g., United States v. Estate Pres. Servs., 202 F.3d
1093, 1096 n.3, 1097, 1099, 1106 (9th Cir. 2000) (enjoining as
"fraudulent conduct" and misleading "commercial speech" the
"marketing" and "selling" of a "training manual" that provided
"false tax advice"); United States v. Raymond, 228 F.3d
804, 807, 815 (7th Cir. 2000) (enjoining as "false or
misleading commercial speech" advertisements and a three-volume
book); United States v. Schiff, 379 F.3d 621 (9th Cir.
2004) (affirming ban on sale of the book titled Federal Mafia,
containing autobiographical information and Schiff's anti-tax
theories, but also offering instructions on how to fraudulently
complete an IRS W-4 Form and providing a two-page attachment for
customers to submit to the IRS with their "zero-income" Forms
1040), petition for cert. filed, 73 U.S.L.W. 3632 (U.S.
Apr. 12, 2005) (No. 04-13); NCBA/NCE v. United States, 843
F. Supp. 655, 665 (D. Colo. 1993) ("Perhaps the NCBA Freedom
Books, standing alone, would amount to mere advocacy. But the
NCBA went so far as to establish the NCE [a warehouse bank] and
tout the privacy it afforded to members. The NCE was clearly
established to thwart enforcement of the tax laws, and as such
was an abusive tax shelter."), aff'd by unpublished
opinion, 42 F.3d 1406 (10th Cir. 1994) .
(b) The First Amendment does not protect speech that is itself
part of a course of illegal conduct. Speech directed toward
committing a crime—for example, conspiracy or tax
fraud—can itself be "conduct." Banning a course of conduct
does not violate the First Amendment "'merely because the conduct
was in part initiated, evidenced, or carried out by means of
language, either spoken, written, or printed.'" Ohralik,
436 U.S. at 456 (citation omitted). See Vill. of
Hoffman Estates v. Flipside, Hoffman Estates, Inc., 455 U.S.
489, 496 (1982) (holding that "the government may regulate or ban
entirely" "speech proposing an illegal transaction"). The
Supreme Court has emphasized that the First Amendment
"does not shield fraud," Madigan v. Telemarketing Assocs.,
Inc., 538 U.S 600, 612 (2003), and has pointed to "[n]umerous
examples ... of communications that are regulated without
offending the First Amendment, such as the exchange of
information about securities, corporate proxy statements, the
exchange of price and production information among competitors,
and employers' threats of retaliation for the labor activities of
employees." Ohralik, 436 U.S. at 456 (citations omitted);
see also Pittsburgh Press Co. v. Pittsburgh Comm'n on Human
Relations, 413 U.S. 376, 389 (1973) (order prohibiting
newspaper from publishing discriminatory advertisement); Nat'l
Soc'y of Prof'l Eng'rs v. United States, 435 U.S. 679, 696-
699 (1978) (injunction against publication of ethical canon);
NLRB v. Retail Store Employees Union, 447 U.S. 607, 616
(1980) (ban on secondary picketing).
(c) The First Amendment does not protect speech that incites
others to imminently violate tax laws. The "incitement" line of
cases began with Brandenburg v. Ohio, in which the Supreme
Court, examining whether the First Amendment applied to
statements to an angry mob, held that First Amendment protection
turned on whether the surrounding circumstances — the
context in which the statements were made — made it likely
that the statements would incite others to imminent lawlessness.
395 U.S. at 448-49. Since Brandenburg, courts have
focused on the "imminence" part of this test. Injunctions
prohibiting tax scheme advocacy have been upheld under
Brandenburg where customers were persuaded and followed
the promoter's advice. See Raymond, 228 F.3d at 815;
United States v. Kaun, 827 F.2d 1144, 1150-52 (7th Cir.
1987). Every circuit that has addressed the issue has
"concluded that the First Amendment is generally inapplicable to
charges of aiding and abetting violations of the tax laws."
Rice v. Paladin Enters., Inc., 128 F.3d 233, 245
(4th Cir. 1997) (collecting cases).
- Fourth Amendment privilege
- Powell does not require a showing of probable cause. United
States v. Powell, 379 U.S. 48, 51 (1964); United States v. White,
853 F.2d 107, 109 (2d Cir. 1988) ("[W]e find the district court's
summons enforcement requirement that the IRS must make a prima facie showing
of 'fraud, overreaching, or excessiveness by the attorney or the Surrogate'
to be inconsistent with Powell's holding that only a showing of a
legitimate purpose, and not a showing of probable cause, is required for
summons enforcement of its summonses and we therefore reverse."). A summons
which complies with the Powell requirements and is narrowly drawn
satisfies the Fourth Amendment. Fisher v. United States, 425 U.S.
391, 401 n.7 (1976). "A summons is not overbroad for the purpose of the
Fourth Amendment ban on 'unreasonable searches and seizures' if the inquiry
is 'within the authority of the agency, the demand is not too indefinite[,]
and the information sought is reasonably relevant.'" United States v.
Judicial Watch, Inc., 371 F.3d 824, 833 (D.C. Cir. 2004) (citing
United States v. Morton Salt Co., 338 U.S. 632, 652-53 (1950) and
Oklahoma Press Publ'g Co. v. Walling, 327 U.S. 186, 209 (1946)).
See also Cypress Funds, Inc. v. United States, 234 F.3d 1267 (6th
Cir. 2000); United States v. Abrahams, 905 F.2d 1276, 1282 (9th Cir.
1990); United States v. McAnlis, 721 F.2d 334, 337 (11th Cir. 1983);
United States v. Roundtree, 420 F.2d 845, 849-50 (5th Cir.
1969).[FN8]
- A taxpayer's Fourth Amendment rights are not implicated by a summons to
a third party. Donaldson v. United States, 400 U.S. 517 (1971);
United States v. Miller, 425 U.S. 435, 440-44 (1976) ("Since no
Fourth Amendment interests of the depositor are implicated here, this case
is governed by the general rule that the issuance of a subpoena to a third
party to obtain the records of that party does not violate the rights of a
defendant, even if a criminal prosecution is contemplated at the time of the
subpoena is issued.").
- A summons which is alleged to have resulted from an unconstitutional
search or other Fourth Amendment violation, however, may be challenged on
Fourth Amendment grounds. United States v. Beacon Fed. Savings &
Loan, 718 F.2d 49, 54 (2d Cir. 1983) (taxpayer alleged that enforcement
of summonses should be denied because they are part of an investigation that
was intensified as the result of an unconstitutional search and seizure by
the revenue agent). A taxpayer must make a substantial preliminary showing
of a Fourth Amendment violation before a court will entertain such
allegations. Id. A summons may be used, however, to obtain
documents previously suppressed in a criminal case because of an improper
search, so long as there is an independent source for knowledge of
documents. McGarry's, Inc. v. Rose, 344 F.2d 416, 418 (1st Cir.
1965) (permitting use of an administrative summons to obtain documents
previously seized in violation of the Fourth Amendment because IRS agent had
knowledge of the documents independent of the unlawful seizure); United
States v. Heubusch, 295 F. Supp. 2d 240 (W.D.N.Y. 2003), vacated and
remanded on other grounds, 123 Fed. Appx. 21 (2d Cir. 2005) (citing with
approval McGarry's, Inc. v. Rose; remanding for consideration of
Fifth Amendment claim).
- Fifth Amendment privilege
- A person summoned to answer questions from an IRS agent is entitled to
assert the Fifth Amendment right not to testify against oneself, where
appropriate. The assertion of the privilege, however, is subject to the
same limitations that obtain in other situations. "The witness is not
exonerated from answering merely because he declares that in so doing he
would incriminate himself—his say-so does not of itself establish the
hazard of incrimination. It is for the court to say whether his silence is
justified." Hoffman v. United States, 341 U.S. 479, 486 (1951);
accord Fisher v. United States, 425 U.S. 391, 410 (1976). "It is
well established that the privilege protects against real dangers, not
remote and speculative possibilities." Zicarelli v. New Jersey State
Comm'n, 406 U.S. 472, 478 (1972); see also Kastigar v. United
States, 406 U.S. 441, 444-45 (1972) (holding that the Fifth Amendment
"protects against any disclosures which the witness reasonably believes
could be used in a criminal prosecution or could lead to other evidence that
might be so used").
- As a corollary to this principle, "a mere blanket assertion of the
privilege will not suffice." United States v. Hatchett, 862 F.2d
1249, 1251 (6th Cir. 1988). The privilege must be asserted with
specificity. If the summoned party appears at a compliance hearing, but is
not given the opportunity to invoke the privilege on a question-by-question
basis because no relevant and specific questions were asked, he will not
have relinquished the privilege. It is thus "incumbent upon the Government
to ask specific questions" when a summoned party does appear. United
States v. Drollinger, 80 F.3d 389, 393 n.5 (9th Cir. 1996) (failure to
appear at enforcement hearing and at contempt hearing and to appeal either
the enforcement or the contempt order did not waive the privilege). If the
agent excuses appearance based on a blanket assertion of the Fifth
Amendment, the IRS may be found to have waived compliance thereby rendering
the summons unenforceable. See United States v. Malnik, 489 F.2d 682
(5th Cir. 1974); United States v. Lipshy, 492 F. Supp. 35, 39 (N.D.
Tex. 1979).
- Some courts will conduct their own in camera examination to determine
whether the privilege has been properly asserted question by question.
United States v. Argomaniz, 925 F.2d 1349, 1355 (11th Cir. 1991).
Courts may provide the summoned party an opportunity to assert the privilege
even after it has enforced the summons. United States v. Allee, 888
F.2d 208 (1st Cir. 1989).
- Act of Production
- A person who invokes the Fifth Amendment as a basis to withhold
documents must "make a showing as to how disclosure of the summoned
documents might tend to incriminate him." United States v. Fox, 721
F.2d 32, 40 (2d Cir. 1983). The act of producing evidence in certain
circumstances may violate an individual's Fifth Amendment rights.
Fisher, 425 U.S. at 410-13. This is so because the act of complying
with the Government's request may have testimonial aspects and an
incriminating effect. See United States v. Doe, 465 U.S. 605, 612
(1984). By producing summoned documents, the taxpayer may tacitly concede
"the existence of the papers demanded and their possession or control by the
taxpayer," and he may authenticate the documents by indicating his "belief
that the papers are those described in the" summons. Fisher, 425
U.S. at 410. See United States v. Hubbell, 530 U.S. 27, 41-43 (2000)
(holding that because the grand jury subpoena was so broad, the respondent
had to "make extensive use of 'the contents of his own mind'" in order to
identify the responsive documents, and the act of producing the documents
therefore had a testimonial aspect) (citation omitted).
- Where the existence, possession and authenticity of the summoned
documents are established as "foregone conclusion[s]," the summoned party's
act of producing the documents "adds little or nothing to the sum total of
the Government's information," and does not "rise[] to the level of
testimony within the protection of the Fifth Amendment." Fisher, 425
U.S. at 411; Doe, 465 U.S. at 614 n.13. As explained in
Fisher, 425 U.S. at 411 (quoting In re Harris, 221 U.S. 274,
279 (1911)), "[u]nder these circumstances ... '[t]he question is not of
testimony but of surrender.'" See United States v. Norwood, 420 F.3d
888, 895-896 (8th Cir. 2005) (existence of documents associated with credit
card accounts a "foregone conclusion"); see also United States v.
Teeple, 286 F.3d 1047, 1049 (8th Cir. 2002); United States v.
Stone, 976 F.2d 909, 911-12 (4th Cir. 1992); United States v.
Rue, 819 F.2d 1488, 1492 (8th Cir. 1987).
- Collective entity doctrine
- There is a critical distinction between collective entities and
individuals, when it comes to the Fifth Amendment. It is well established
that an individual cannot rely on his Fifth Amendment privilege against
compulsory self-incrimination to avoid producing the records of a collective
entity which are in his possession in a representative capacity.
Braswell v. United States, 487 U.S. 99, 104 (1988); Bellis v.
United States, 417 U.S. 85, 88 (1974); In re Grand Jury
Proceedings, 771 F.2d 143, 148 (6th Cir. 1985) (en banc). While this
rule was first announced with respect to corporate records, it also applies
to other collective entities including dissolved corporations, partnerships,
labor unions and other unincorporated associations. Bellis, 417 U.S.
at 88-89. This rule also applies to former officers of a corporation. In re
Grand Jury Subpoena Dated Nov. 12, 1991, 957 F.2d 807, 812 (11th Cir. 1992)
("We hold that a custodian of corporate records continues to hold them in a
representative capacity even after his employment is terminated. It is the
immutable character of the records as corporate which requires their
production and which dictates that they are held in a representative
capacity. Thus, the production of such documents is required regardless of
whether the custodian is still associated with the corporation or other
collective entity."). But see In re Three Grand Jury Subpoenas Duces Tecum
Dated Jan. 29, 1999, 191 F.3d 173 (2d Cir. 1999); In re Grand Jury Subpoena
Duces Tecum Dated June 13, 1983 & June 22, 1983, 722 F.2d 981 (2d Cir.
1983).
- Required records exception
- The "required records" exception to the Fifth Amendment applies to the
disclosure of documents which persons in a regulated industry are required
by the Government to maintain. See generally In re Grand Jury
Proceedings, 601 F.2d 162, 168 (5th Cir. 1979). There are
several reasons for this rule, notably that "the public interest in
obtaining such information outweighs the private interest opposing
disclosure and the further rationale that such records become tantamount to
public records." Id. (internal citations omitted). Additionally,
courts have held that production of such records is "in a sense consented to
as a condition of being able to carry on the regulated activity involved."
Id. at 171.
- The Supreme Court first recognized the required records exception in
Shapiro v. United States, 335 U.S. 1 (1948), and formulated the
standards for the exception in Grosso v. United States, 390
U.S. 62, 67-68 (1968):
- The premises of the doctrine, as it is described in Shapiro, are
evidently three: first, the purposes of the United States' inquiry must be
essentially regulatory; second, information is to be obtained by requiring
the preservation of records of a kind which the regulated party has
customarily kept; and third, the records themselves must have assumed
"public aspects" which render them at least analogous to public
documents.
- This formulation of the rule has become a three-part test that courts
generally apply to determine whether the required records exception applies.
See generally In re Grand Jury Subpoena, 21 F.3d 226, 228 (8th Cir.
1994).
- The required records exception is distinguishable from the "collective
entity doctrine," which holds that collective entities such as corporations
have no Fifth Amendment protection. See generally In re Grand Jury
Subpoena Dated Nov. 12, 1991, 957 F.2d at 810. Although sole
proprietors are not subject to the collective entity doctrine and may
otherwise have Fifth Amendment rights, they are subject to the required
records exception. See In re Grand Jury Subpoena, 21 F.3d at 230;
see also In re Grand Jury Subpoena Duces Tecum Served upon Underhill,
781 F.2d 64, 67- 70 (6th Cir. 1986) (applying required records exception to
sole proprietorships); Bionic Auto Parts & Sales, Inc. v. Fahner, 721
F.2d 1072, 1082 (7th Cir. 1983); Herman v. Galvin, 40 F. Supp. 2d 27,
29 (D. Mass. 1999).
- Courts have held that the required records exception applies to income
tax return preparers who are compelled by Section 6107(b) to retain and
disclose tax returns. See United States v. Nordbrock,65 A.F.T.R.2d
(RIA) 660, 662 (D. Ariz. 1990), rev'd on other grounds 941 F.2d 947
(9th Cir. 1991); United States v. Bohonnon, 628 F. Supp 1026, 1028-29
(D. Conn.), aff'd without opinion, 795 F.2d 79 (2d Cir. 1985). But at
least one circuit has refused to apply the exception to records required by
Section 6001. United States v. Porter, 711 F.2d 1397, 1404-05 (7th
Cir. 1983).
- Non-possession
- When an IRS summons is served, the rights and obligations of the party
on whom the summons was served become fixed. United States v. Darwin
Constr. Co., 873 F.2d 750, 755 (4th Cir. 1989). Receipt of a summons
imposes a duty to retain possession of the documents pending a judicial
determination of the enforceability of the summons. United States v.
Asay, 614 F.2d 655, 660 (9th Cir. 1980).
- If the respondent did not have possession or control of the documents at
the time the summons was served, he must raise this as a defense to
enforcement of the summons in the initial enforcement proceeding. United
States v. Rylander, 460 U.S. 752, 757 (1983). Lack of possession or
control of the requested records is a defense to the enforcement of a
summons only if the respondent properly establishes non-possession.
Id. The Government is not required to make any showing that the
requested books and documents are within the possession or control of the
respondent. On the contrary, the respondent bears the burden of producing
credible evidence of non- possession. See United States v. Lawn
Builders of New England, Inc., 856 F.2d 388, 392 (1st Cir. 1988)
(stating that the court "rejected the contention that the IRS must prove
by positive evidence the existence of the records and their possession
by the summonee") (emphasis in original) (citing United States v. Freedom
Church, 613 F.2d 316, 322 (1st Cir. 1979); United States v.
Huckaby, 776 F.2d 564, 567 (5th Cir. 1985) (a defendant must prove a
lack of possession by the introduction of "credible evidence"); United
States v. Graber, 81 A.F.T.R.2d (RIA) 429 (8th Cir. 1998). Thus, if the
respondent wishes to raise a defense of non-possession, he must present
credible evidence that he does not have possession or control of the
requested documents.
- Not possessing the records is not a defense to enforcement of the
summons if the respondent caused the records to not be in his possession
after receiving the summons. Asay, 614 F.2d at 660. "Not
surprisingly, the law does not allow a custodian of records to send them
away after receiving a summons and then claim he cannot produce them because
they are no longer in his possession." United States v. Three Crows
Corp., 324 F. Supp. 2d 203, 206 (D. Me. 2004).
- The Fifth Amendment may not be invoked as a substitute for evidence
proving that the records are not in the respondent's possession. The Fifth
Amendment privilege "has never been thought to be in itself a substitute for
evidence that would assist in meeting a burden of production."
Rylander, 460 U.S. at 758. The Supreme Court analogized to a
criminal defendant's right against self-incrimination: "That the defendant
faces such a dilemma demanding a choice between complete silence and
presenting a defense has never been thought an invasion of the privilege
against compelled self-incrimination." Id. at 759 (emphasis
omitted). If the Fifth Amendment were permitted to replace the burden to
produce evidence, it "would convert the privilege from the shield against
compulsory self-incrimination which it was intended to be into a sword
whereby a claimant asserting the privilege would be freed from adducing
proof in support of a burden which would otherwise have been his."
Id. at 758. Just as a defendant in a criminal trial is required to
produce evidence of any defense he wishes to raise, so too must the
respondent produce credible evidence of non- possession if he wishes to
raise it as a defense to enforcement.
- Often the taxpayer first asserts non-possession in a contempt proceeding
following the taxpayer's failure to comply with an enforcement order.
However, once a court orders enforcement of the summons, a presumption
arises that the documents are in existence and in the continuing possession
and control of the respondent. United States v. Sorrells, 877 F.2d
346, 348 (5th Cir. 1989). See also United States v. Roberts, 858
F.2d 698, 701 (11th Cir. 1988) (court's enforcement order is res judicata on
the issue of possession at the time when the order was entered). Because
parties may not relitigate the merits of the original court order at a
contempt proceeding, taxpayers may not avoid contempt by arguing that the
documents were not in their possession prior to enforcement.
Rylander, 460 U.S. at 757; Lawn Builders of New England, Inc.,
856 F.2d at 395. However, the respondent may raise a present
inability to comply as a defense to entry of an order of contempt. "While
the court is bound by the enforcement order, it will not be blind to
evidence that compliance is now factually impossible." Rylander, 460
U.S. at 757. A taxpayer claiming present inability to comply with
the summons has the burden of production with respect to that impossibility.
Id. See also United States v. Drollinger, 80 F.3d 389, 393
(9th Cir. 1996); United States v. Sorrells, 877 F.2d at 349.
Self-serving denials by the respondent are not sufficient to meet this
burden. Roberts, 858 F.2d at 701. The respondent must show that he
undertook "in good faith all reasonable efforts to comply." United
States v. Rizzo, 539 F.2d 458, 465 (5th Cir. 1976).
- Improper purpose or institutional bad faith
- Taxpayers may argue that the IRS summons was issued for an improper
purpose by alleging that the IRS acted in bad faith in issuing the summons,
issued the summons to harass the taxpayer, or that the IRS is pressuring the
taxpayer to settle a collateral dispute.
- A court must look at the "institutional posture" of the IRS and
determine whether the summons was issued with the intent to harass the
taxpayer. United States v. LaSalle Nat'l Bank, 437 U.S. 298, 316
(1978). In United States v. Millman, 822 F.2d 305 (2d Cir. 1987),
the Second Circuit further explained the "institutional posture"
test:
[T]he "institutional posture" test is the appropriate standard for
determining whether a summons is issued merely to harass the taxpayer, that
the motive of an agent involved in an investigation is a relevant factor in
determining that institutional posture, as are the particular facts of each
investigation and each taxpayer's situation, and that while the
institutional test is applicable to a claim such a Millman's, how that
posture, and the good faith of the IRS, are determined is a matter for
case-by-case adjudication.
Id. at 309. While the personal intent of the agent is
relevant, it is not dispositive. LaSalle Nat'l Bank, 437
U.S. at 316. The taxpayer must disprove the actual
existence of a valid purpose by the IRS in issuing the
summons. "After all, the purpose of the good-faith inquiry is to
determine whether the agency is honestly pursuing the goals of
§ 7602 by issuing the summons." Id.
- The taxpayer cannot meet this burden if he or she makes mere conclusory
allegations without specific facts showing an improper purpose.
LaSalle, 437 U.S. at 316. In responding to the Government's showing,
the taxpayer must factually oppose the Government's allegations by
affidavit. Legal conclusions or mere memoranda of law will not suffice.
United States v. Garden State Nat'l Bank, 607 F.2d 61, 71 (3d Cir.
1979) (conclusory allegations are insufficient). If the taxpayer meets his
burden, he may be provided an opportunity to substantiate his or her claims
in a limited evidentiary hearing. (See
Section III.C.)
- Although the following list of cases is not exclusive, it illustrates
various arguments that a taxpayer might make regarding the impropriety of
the Government in attempting to enforce the summons:
- Summons issued to harass taxpayers: United States v. Cmty.
Fed. Sav. & Loan Ass'n, 661 F.2d 694 (8th Cir. 1981);
United States v. Cecil E. Lucas Gen. Contractor, Inc., 406
F. Supp. 1267 (D.S.C. 1975).
- Improper ex parte communications between the IRS Appeals
Office and the Examination Division: Robert v. United
States, 364 F.3d 988 (8th Cir. 2004) (even though the
court found that the ex parte communications were improper,
the summonses were enforced because the improper
communications did not evidence bad faith or an improper
purpose in issuing the summonses).
- The summonses allegedly were issued to retaliate against the
taxpayers for exercising their rights to free association,
free speech, and substantive and procedural due process.
United States v. Kis, 658 F.2d 526, 539 (7th Cir.
1981).
- The IRS might improperly disclose the summoned documents:
United States v. Barrett, 837 F.2d 1341 (5th Cir. 1988)
(holding that the district court may not conditionally enforce
a summons to prevent violations of I.R.C. § 6103);
United States v. Jose, 131 F.3d 1325, 1328 (9th Cir.
1997) (en banc) (reversing the district court's order
requiring the IRS to notify the taxpayer before distributing
the summoned documents to other divisions of the IRS,
including CI).
- IRS committed fraud in gathering information used to
issue the summons: United States v. Deak-Perera & Co.,
566 F. Supp. 1398, 1402 (D.D.C. 1983).
- Summons used to skirt discovery rules: PAA Mgmt., Ltd. v.
United States, 962 F.2d 212 (2d Cir. 1992); United
States v. Admin. Co., 74 A.F.T.R.2d (RIA) 5252 (N.D. Ill.
1994) (holding that where summonses were issued before Tax
Court petition is filed, there is no abuse of Tax Court's
discovery rules).
- Information used to prepare summons came from illegal wiretap:
United States v. Millstone Enters., Inc., 864 F.2d 21
(3d Cir. 1988) (holding that district court erred in
considering whether summons was based on illegal wiretap at
contempt hearing).
- Criminal referral
- Taxpayers occasionally complain that a civil summons was issued in bad
faith because the IRS was attempting to collect information by which it can
bring criminal charges. The possibility that criminal charges could be
considered at some time in the future does not make the summons invalid.
Donaldson v. United States, 400 U.S. 517, 544 (1971). Indeed, a
summons may be issued in furtherance of a criminal investigation. Prior to
1982, the IRS summons power could be exercised only if there was a civil
purpose to the examination, but the enactment of I.R.C. § 7602(b)
changed that. Now, a summons may be issued solely in furtherance of a
criminal investigation, provided that the matter has not yet been referred
to the Department of Justice for review and prosecution. (See
Section II(B)(2)(b).)
- Intervening events
- In general, the validity of a summons is tested as of the date of
issuance and events occurring after the date of issuance, but before
enforcement, should not affect enforceability. See Garpeg, Ltd.
v. United States, 583 F. Supp. 799 (S.D.N.Y. 1984) (subsequent referral
to the Department of Justice for criminal prosecution); PAA Mgmt., Ltd.
v. United States, 962 F.2d 212, 219 (2d Cir. 1992) (filing of Tax Court
petition after issuance of summons); United States v. Admin. Enters.,
Inc., 46 F.3d 670 (7th Cir. 1995) (passage of time since issuance of
summons).
- There are two notable exceptions to the general rule: First, compliance
with the summons before enforcement is ordered will, in most cases, obviate
the need for an enforcement order. However, compliance by the summoned
person after an enforcement order is issued will not moot an appeal of an
enforcement order or of the denial of a petition to quash the summons.
Church of Scientology v. United States, 506 U.S. 9, 17-18 & n. 11
(1992).
- Second, an enforcement action cannot be commenced after a "Department of
Justice referral" (as defined in Internal Revenue Code section 7602(d)) has
been made. This prohibition applies as well to seeking enforcement in
response to a petition to quash, as is permitted by Section 7609(b)(2)(A).
DeGroote v. United States, 57 A.F.T.R.2d (RIA) 1373 (W.D.N.Y.
1986).
D. SPECIALTY SUMMONSES
- John Doe summonses
- John Doe summonses are issued to discover the identities of unknown
taxpayers. All proceedings involving such summonses are handled by the Tax
Division. The Tax Division's current policy is that a Deputy Assistant
Attorney General for the Tax Division should approve the filing of a
petition seeking authorization to serve a John Doe summons. (See
Section III.E.)
- In United States v. Bisceglia, 420 U.S. 141 (1975), the Supreme
Court held that Sections 7601 and 7602 of the Internal Revenue Code
empowered the IRS to issue John Doe summonses to discover the identity of
unknown taxpayers. Congress subsequently codified this authority in Section
7609(f), which requires that, before the IRS may serve a John Doe summons,
it must obtain authorization from a federal district court judge in an ex
parte court proceeding.
- At the ex parte court proceeding, the Government must establish (1) that
the summons relates to the investigation of a particular person or
ascertainable group or class of persons; (2) that there is a reasonable
basis for believing that such person or group or class of persons may fail
or may have failed to comply with any provision of any internal revenue law;
and (3) that the information sought to be obtained from the examination of
the records or testimony (and the identity of the person or persons with
respect to whose liability the summons is issued) is not readily available
from other sources. I.R.C. § 7609(f). See In re Does, 671
F.2d 977 (6th Cir. 1982); see also United States v. Pittsburgh Trade
Exch., Inc., 644 F.2d 302, 306 (3d Cir. 1981); United States v.
Brigham Young Univ., 679 F.2d 1345, 1349-50 (10th Cir. 1982) rev'd on
other ground, 459 U.S. 1095 (1983); United States v. Kersting,
891 F.2d 1407, 1409 (9th Cir. 1989).
- If the summoned party refuses to comply with a John Doe summons, the
Government can pursue enforcement by filing a petition with the federal
district court in which the summoned party resides or is found. The
traditional Powell factors also apply to enforcement of a John Doe
summons. Pursuant to Section 7609(e)(2), the running of the statute of
limitations with respect to the John Doe is suspended, if compliance with
the John Doe summons is not resolved within six months after service of the
summons.
- Summons for records from a church (I.R.C. §
7611)
- Special rules apply when issuing and seeking enforcement of a summons
issued as part of an examination of a church. All proceedings involving the
enforcement of such summonses are to be handled by the Tax Division. As a
matter of practice, a Deputy Assistant Attorney General and the appropriate
Section Chief should be notified whenever a suit to enforce a summons in
connection with an examination of a church has been received by the Tax
Division.
- Section 7611 imposes procedural and substantive requirements on the
IRS's ability to examine the tax exempt status of a church and whether any
of its activities may be subject to tax. The term "church" includes any
organization claiming to be a church and any convention or association of
churches. I.R.C. § 7611(h)(1); Treas. Reg. § 301.7611-1,
Q&A3.
- The statute requires that before the IRS may even inquire, a "high-level
Treasury official" must reasonably believe, based on facts and circumstances
recorded in writing, that the church may not be exempt or that it is
carrying on an unrelated trade or business that is subject to tax or may
have engaged in activities that are subject to tax. It is important to make
sure that the person making this determination has been properly delegated
this responsibility. Once the high-level official forms the required
belief, a church is entitled to written notice of and the basis for the
belief.
- In order to begin a church tax examination, in addition to the notice of
inquiry, a notice of examination must be sent to the church, with a copy to
Division Counsel/Associate Chief Counsel, Tax Exempt and Government
Entities, describing the records and activities which the IRS seeks to
examine. The notice must describe the IRS's concerns and include copies of
all relevant documents which would be disclosable if a FOIA request had been
made. In addition, the notice must provide an opportunity for a conference
with the IRS. Any examination must be completed within two years from the
date of the notice of examination. This period will be suspended under
certain circumstances, including any period during which a summons
enforcement proceeding is pending.
- Church records may be examined only, "to the extent necessary" to
determine liability for and amount of tax. Religious activities may be
examined only "to the extent necessary" to determine whether an
organization claiming to be a church is a church for any period.
Accordingly, in addition to the Powell requirements, the Government's
papers must demonstrate "necessity," which requires a particularized showing
of need for each category of records summoned. United States v. C.E.
Hobbs Found. for Religious Training & Educ., Inc., 7 F.3d 169 (9th Cir.
1993); United States v. Church of Scientology Western U.S., 973 F.2d
715 (9th Cir. 1992); United States v. Church of Scientology of Boston,
Inc., 933 F.2d 1074 (1st Cir. 1991).
- Summons for computer software (I.R.C. § 7612)
- Computer software, particularly the underlying source code, may be
valuable intellectual property that often contains copyrighted material or
trade secrets. See United States v. Norwest Corp. 116 F.3d
1227 (8th Cir. 1997); United States v. Caltex Petroleum Corp., 12 F.
Supp. 2d 545 (N.D. Tex. 1998). Congress has specified the circumstances
under which the IRS may summon and use software and source code. I.R.C.
§ 7612. Section 7612 has two important parts: (1) protection for the
confidentiality of all executable software; and (2) special rules for
summoning the source code of tax related software.
- "Computer software executable code" is "any object code, machine code,
or other code readable by a computer when loaded into its memory and used
directly by such computer to execute instructions." I.R.C.
§ 7612(d)(3)(A). Section 7612 protects the confidentiality of
executable software by (1) giving courts jurisdiction to enter protective
orders for software; and (2) imposing conditions on the use of software that
comes into possession of the IRS, notwithstanding the terms of any
protective order. The conditions include limiting access to the software to
specific IRS personnel identified to the taxpayer, limiting use of the
software to the audit at hand, returning the software at the end of the
audit, and agreeing not to disclose information learned about the software.
Additionally, § 7612(c)(2)(H) makes it clear that software shall be
treated as return information for purposes of I.R.C. § 6103.
- Section 7612 also details the circumstances under which the IRS can
summon computer software source code. Source code is defined as a "code
written by a programmer using a programming language which is comprehensible
to appropriately trained persons and is not capable of directly being used
to give instructions to a computer." I.R.C. § 7612(d)(2)(a). For
purposes of § 7612, source code also includes programmer notes, design
documents, memoranda, and similar documents, as well as related customer
communications. I.R.C. §§ 7612 (d)(2)(B) & (C).
- Before the IRS may issue a summons for source code, it must show that it
is not able to ascertain the correctness of an item on the return by using
the taxpayer's books, papers, records, or other data, or by using the
executable version of the program (the version the taxpayer used). In this
narrow circumstance, Congress has decided that the IRS is required to prove
need before it can get the source code. Further, the IRS must identify,
with specificity, the portion of the source code that is necessary to verify
the correctness of an item on the return. Additionally, the Secretary or his
delegate must make a determination that the need for the source code
outweighs the risks of unauthorized disclosure of trade secrets.
- There are exceptions to these requirements for criminal investigations,
source code acquired or developed for internal use rather than being
available for commercial distribution, any communications between the
software owner and the taxpayer, and any tax-related computer source code
that is required to be produced by some other section of the Code. I.R.C.
§ 7612(b)(2).
- Summons pursuant to Tax Treaty and Tax Information
Exchange
- The IRS may exercise its summons authority to carry out any obligations
of the United States under a bilateral tax treaty or tax information
exchange agreement (TIEA) with the United States. A TIEA allows both parties
to obtain from each other information that "may be necessary or appropriate
to carry out and enforce the[ir] tax laws." I.R.C.
§ 274(h)(6)(C)(i). The United States is party to more than 50
bilateral tax treaties and 15 bilateral TIEAs which can be used by either
the United States or its treaty partner to obtain documents and testimony
located in the other party's territory for criminal and civil tax
investigations and proceedings. These pacts are concluded by the United
States Department of Treasury, with the assistance of the IRS and the Tax
Division of the Department of Justice, and are administered by the Director,
International, Large and Mid- Size Business Division, IRS, as the Competent
Authority for the United States.
- When a treaty partner makes a request to the United States under one of
these pacts, the Office of the Competent Authority refers the matter to
either a revenue agent or special agent in the field where the evidence is
located, and directs the agent to undertake the execution of the request.
The agent will attempt to obtain the requested information by asking the
witness(es) or record holder(s) in question to provide such information
voluntarily, but, if the information cannot be obtained voluntarily, the
agent will issue summons(es) on behalf of the treaty partner to obtain the
requested information.
- The Tax Division typically conducts such litigation arising from a
summons issued on behalf of a treaty partner in much the same way as it
would with respect to an IRS summons issued for a domestic tax
investigation. This summary procedure has been explicitly approved in the
context of an IRS summons issued in furtherance of the Government's
obligations under a tax treaty or TIEA. United States v. Stuart, 489
U.S. 353 (1989); Barquero v. United States, 18 F.3d 1311, 1316
(5th Cir. 1994). To obtain enforcement of a treaty partner summons, the IRS
must establish the four Powell factors. While the IRS must establish
its good faith in issuing the summons, the IRS does not have to attest
to—much less prove þ the good faith of the requesting nation.
Mazurek v. United States, 271 F.3d 226, 231 (5th Cir. 2001).
- The Government makes a prima facie showing for enforcement by
submitting, in addition to the declaration of the IRS agent who issued the
summons, the declaration of the U.S. Competent Authority responsible for
administering the tax treaty in question. Stuart, 489 U.S. at 360;
Barquero, 18 F.3d at 1316-17.
- The Competent Authority's declaration should include a description of
the duties and responsibilities of the Competent Authority (i.e.,
administering all exchange of information programs under tax treaties and
exchange of information agreements) and the identification and description
of the foreign request. In general, the Competent Authority should aver
that:
(1) the summons was issued and served in response to a request by
a foreign government;
(2) the Competent Authority personally reviewed the request;
(3) the Competent Authority determined that the request is
properly within the scope of the tax treaty in question;
(4) the Competent Authority determined that it is appropriate for
the United States to give assistance to the foreign country in
question pursuant to the request;
(5) the foreign tax authorities have reason to believe that the
subject of the foreign tax inquiry may have failed to comply with
the foreign country's tax laws during the periods covered by the
summons;
(6) the requested information is not within the possession of the
IRS or the foreign authorities;
(7) the requested information may be relevant to a determination
of the foreign subject's tax liability;
(8) the same type of information can be obtained by the foreign
tax authorities under the foreign country's tax laws;
(9) it is the understanding of the parties to the tax treaty in
question that information exchanged will only be used by the
applicant State for the purposes identified in the tax treaty;
(10) exchanged information may only be disclosed as required in
the normal administrative or judicial process operative in the
administration of the tax system of the applicant State; and
(11) improper use of the information would be protested and, if
continued, would lead to recommendations to terminate the tax
treaty.
An attorney to whom a treaty-partner summons is assigned may
obtain the declaration of the Competent Authority by contacting
Branch 7, Associate Chief Counsel (International), IRS. That
office may also provide advice and other forms of assistance for
the conduct of the litigation.
- Designated summonses (I.R.C. § 6503(j))
- Designated summonses are very rare. All proceedings involving such
summonses are handled by the Tax Division.
- Examinations of large corporations may warrant the application of a team
examination approach and the examination may qualify as a "Coordinated
Industry Case" (CIC). See I.R.M. §§ 4.45.1.2, et
seq.[FN9] Designated summonses are only issued in connection with a CIC.
I.R.M. § 25.5.3.3(2); I.R.C. § 6503 (j)(1). Often in CIC
exams, taxpayers will agree to extend the statute of limitations on
assessment in order to permit the IRS to complete the audit and obtains the
information it needs by asking for the information through information
document requests (IDR's). However, on occasion, a CIC taxpayer will
decline to voluntarily produce information the IRS agents need to complete
the audit, and will also decline to voluntarily extend the statute of
limitations. In such circumstances the IRS can unilaterally extend the
statute of limitations on assessment by issuing a designated summons and
seeking judicial enforcement of that summons (or related summonses issued
within thirty days of the issuance of the designated summons). This helps
explain why designated summons cases are often contentious—the IRS is
holding the statute of limitations open when the taxpayer does not want the
statute extended.
- A designated summons must meet three specific requirements:
(1) Prior to issuance, a designated summonses must be reviewed by
Area Counsel of the Office of Chief Counsel, for the region where
the examination is being conducted. I.R.C. §
6503(j)(2)(A)(i);[FN10]
(2) A designated summons must be issued at least 60 days before
the statute of limitations will expire (including any extensions
the taxpayer has agreed to. I.R.C. § 6503(j)(2)(A)(ii);
(3) And the summons must specifically state on its face that it
is a designated summons. I.R.C. § 6503(j)(2)(A)(iii).
- The standard for enforcement of a designated summons is the
Powell standard. It is not necessary for the IRS to make any showing
that the taxpayer had been uncooperative in the audit prior to the issuance
of the summons. United States v. Derr, 968 F.2d 943 (9th Cir.
1992).
- The IRS may only issue one designated summons per return. However, the
IRS may issue other summonses within the 30-day period beginning when the
designated summons is issued that relate to the same return which also will
hold the statute of limitations open during the judicial enforcement period.
I.R.C. § 6503(j)(1)(A)(ii).
- The designated summons does not itself toll the running of the statute
of limitations. If the designated summons or a related summons is enforced,
the statute of limitations remains suspended for 120 days after the end of
the judicial enforcement period. I.R.C. § 6503 (j)(1)(B). If the
designated summons is not enforced, the statute remains open for 60 days
after the close of the judicial enforcement period.
- The IRS must seek judicial enforcement of the designated or related
summonses before the statute of limitations expires. If it does so, the
statute of limitations is suspended during the judicial enforcement period,
which is defined as the period beginning of the day the proceeding to
enforce the summons is brought and ending on the day on which there is a
"final resolution" as to the summoned person's response to each summons.
I.R.C. § 6503(j)(3).
- The term "final resolution" of the summoned person's response to such
summons is not defined by statute. The IRS has issued proposed regulations
dealing with this question. Prop. Treas. Reg. § 20.8199-91, 68
Fed. Reg. 44905-01 (2003), reprinted in 2003-2 C.B. 756. The
proposed regulations, relying on the legislative history, assert that the
term "final resolution" in the context of a designated summons is the same
as it is under I.R.C. § 7609 (e)(2)(B), namely that no court
proceedings remain pending, the period for appeal has run, and the summoned
party has fully complied with the summons to the extent ordered by the
court. If all appeal periods have expired but the summoned party has not
complied with the summons to the extent required by the court order, the
proposed regulations provide that final resolution does not occur until the
summoned party has complied with the summons to the extent of the court
order.
- However, because designated summonses are issued in connection with the
audit of large corporate returns, the summoned information is often
voluminous and complex. Therefore, it is not always the case that the IRS
agents will be able to immediately determine that the taxpayer has fully
complied. The proposed regulations deal with this problem by stating that
the determination of compliance will be made as soon as practicable, and
that notice of the determination shall be made in writing within five days.
If the taxpayer is not satisfied with leaving this issue in the hands of the
IRS, it may give the IRS a written statement of compliance that requests the
IRS issue a determination that the taxpayer has fully complied with the
summons. If the taxpayer files a statement of compliance within 180 days of
receipt of the statement, the IRS must notify the taxpayer by certified mail
that the IRS is not satisfied with the taxpayer's compliance. If the IRS
does not issue such a notice, the summons will be deemed to have been
complied with as of the 180th day after the statement of compliance was
received.
III. PROCEDURES
A. PETITION TO ENFORCE
- Which office should file
- The United States Attorneys Manual
§§ 6-5.210 and
6-5.221 provide that, in general, IRS Chief
Counsel attorneys may directly refer to the United States Attorneys routine
requests to enforce summonses and to defend petitions to quash. Cases
involving sensitive or novel issues should be referred to and are to be
handled by the Tax Division. The manual provides that Tax Division
attorneys are to handle cases involving summonses issued to or for:
- attorneys
- churches
- newspapers and newspaper reporters
- tax accrual workpapers (tax pool analysis)
- foreign document requests
- treaty partners or other matters with international
implications
- John Doe summonses
- Section 6050I
- novel/complex Fifth Amendment claims
- computer software and other non-traditional items
- state/local agencies and courts
- designated summonses
- consent directives
- Sections 6700 and 6701
- Sections 6707 and 6708
- other unique issues as may be determined from time to time.
- Among the issues that the Tax Division has determined it should handle
are all summons proceedings involving examinations of promoters
of:
- tax shelters,
- scams,
- and schemes.
- In addition, the Division handles all summons proceedings
arising from the Offshore Credit Card Project when the summons
involves a request for offshore records.
- The Chief of the appropriate Civil Trial Section should be notified
immediately of all adverse decisions. All appeals, whether initiated by the
United States or the other party, will be handled by the Appellate Section
of the Tax Division.
U.S.A.M. § 6-5.230. If you
have any questions, please contact the Chief of the appropriate Civil Trial
Section:
- Civil Trial Section, Central, Seth G. Heald, Chief
- Civil Trial Section, Northern, Patrick D. Mullarkey, Chief
- Civil Trial Section, Eastern, David A. Hubbert, Chief
- Civil Trial Section, Southern, Michael J. Kearns, Chief
- Civil Trial Section, Southwestern, Louise P. Hytken, Chief
- Civil Trial Section, Western, Richard R. Ward, Chief
- Approvals
- Proceedings to enforce certain types of summonses must be approved by
higher level officials at the Tax Division:
- Summonses to attorneys and law firms must be approved by the
Assistant Attorney General, Tax Division.
- "John Doe" summonses must be approved by the Deputy Assistant
Attorney General, Tax Division.
- Summonses to the press or media for information other than
purely financial records unrelated to the news gathering
function (e.g.,employment records of an employee of a
newspaper) must be approved by the Attorney General. A
request for such approval should be submitted through the
Deputy Assistant Attorney General and Assistant Attorney
General of the Tax Division.
- Documents to File
- Documents for submission may vary from court to court. Consult local
rules and practice to determine what is needed in your jurisdiction.
- Documents for submission to the court to enforce a summons generally
include (1) petition, (2) declaration, and (3) proposed order to show cause.
The attached forms provide suggested language, but they should be tailored
to fit the requirements of the local jurisdictions.
- The petition [Exhibit 2] provides the jurisdictional
grounds for the suit, asserts the underlying facts, and provides a request
for relief. Fed. R. Civ. P. 8. It also demonstrates satisfaction of the
relevant legal standards and tests.
- The agent issuing and serving the summons is generally the one signing
the declaration [Exhibit 3] for submission with the petition.
It is a sworn statement putting forward the relevant facts in the case. If
the IRS provides an agent declaration with the request to enforce, the
assigned attorney should review it carefully to assure that it satisfies all
requirements necessary to enforcement and does not contain any extraneous
recitations. Moreover, the attorney should review any declaration with the
agent, even if it has already been signed, to assure that it is still
accurate and complete. Even though establishing a prima facie case for
enforcement through an agent's declaration "isn't much of a hurdle," 2121
Arlington Heights Corp. v. IRS, 109 F.3d 1221, 1224 (7th Cir. 1997),
attorneys should take care to present persuasive support for enforcement
through the declarations. A well-drafted declaration should anticipate
defenses to enforcement.
- The typical proposed show cause order [Exhibit 4] either
sets the time and date for a hearing or provides a place for the court to do
so. It also includes a finding that the Powell factors have been
met, and sets deadlines for any response.
- The order to show cause, when approved by the judge, represents a
determination that the United States has made a prima facie showing that the
Powell requirements have been satisfied and, consequently, shifts the
burden to the summoned person to demonstrate or "show cause" why the summons
should not be enforced. In order for the court to obtain personal
jurisdiction over the summoned person, the summoned person must be served
with the order to show cause. See United States v. Gilleran, 992
F.2d 232, 233 (9th Cir. 1993) ("The district court acquires personal
jurisdiction over the taxpayer by service of the show cause order and the
petition for enforcement of the summons."); United States v. Miller,
609 F.2d 336, 338 (8th Cir. 1979) (service of summons and complaint not
required, as "[t]he district court predicated personal jurisdiction on the
service of the show cause order and the petition for enforcement" on
respondent); United States v. McCarthy, 514 F.2d 368, 372 (3d Cir.
1975) ("Process on the complaint could be in the form of an order served on
the person summoned fixing a deadline for filing any responsive pleading,
albeit an informal pleading, together with an affidavit, and any motions,
and directing that person to show cause at a date and time certain why an
order should not be entered enforcing the administrative summons. The order
should provide that unless the court determines otherwise, any motions and
issues raised by the pleadings will be considered at the return date of the
order to show cause.").
- Service of order to show cause
- After the court issues the order to show cause, it must be served on the
summoned party. Service of process other than a district court summons or a
subpoena is governed by Fed. R. Civ. P. 4.1, which provides for service by
the "United States marshal, or a person specially appointed for that
purpose, who shall make proof of service as provided in Rule 4(l)."
Accordingly, the proposed order to show cause presented to court should
provide that service may be made by any agent, officer, or other person
designated by the IRS. A copy of the petition, declaration, and any other
document submitted to the court in support of the petition must be served on
the summoned party along with the order to show cause. The proposed order
to show cause should provide for the method(s) of service and may propose
alternative service methods for the court's consideration. The person
making service should complete a proof of service provided by the trial
attorney or Assistant United States Attorney.
- Monitoring compliance
- As soon as an order requiring compliance of a summons is received, the
attorney should forward it to the issuing agent with a request to be
informed whether there has been compliance. Under ordinary circumstances,
the issuing agent will receive the summoned documents and testimony. The
attorney should remain available to the agent to facilitate compliance. The
case file is not ready to be closed until the summoned party has complied.
- Contempt procedures
- An attorney assigned to a summons enforcement case should monitor the
case to assure full compliance with any enforcement order. If a party has
not fully complied with the summons, the attorney should attempt to confer
with the party to determine if the party will comply without additional
judicial action. Once the attorney determines that the party will not
comply, the attorney should file a motion to find the respondent in
contempt.
- The motion should identify the order of the court (the summons
enforcement order) with which the respondent failed to comply, and should
detail the respondent's noncompliance. The motion for contempt should be
supported with a declaration from the agent setting forth that respondent
was aware of the order and that respondent failed to comply with the order.
The motion for contempt is generally accompanied by a proposed order to show
cause why respondent should not be held in contempt, which sets a hearing
date for further court action.
- At any hearing on contempt, the attorney should be prepared to address
any issues the respondent may raise for failing to comply, such as current
non-possession of the information, or the Fifth Amendment. The attorney
should also be prepared to address possible coercive sanctions for
non-compliance, including fines and incarceration.
B. RESPONDING TO PETITIONS TO QUASH
When a petition to quash a summons is filed, the Government should file
an appropriate response as soon as possible. The response may take the form
of a motion to dismiss for lack of jurisdiction, a motion for summary
denial, a counterclaim for enforcement, or something similar in accordance
with local practice.
The Government may, but is not obligated to, file a counter- petition or
motion to enforce the summons. (See
Section II(B)(4)(b)).
The United States may simply move to dismiss the petition to quash pursuant
to Fed. R. Civ. P. 12(b)(6). See Cosme v. Internal Revenue Service,
708 F.Supp. 45, 48 (E.D.N.Y. 1989); Tarpley v. United States, 1997 WL
767577, *1 (S.D.N.Y. Dec 11, 1997). If the United States files a motion to
dismiss without simultaneously seeking an order enforcing the summons, the
United States need not establish a Powell prima facie case; rather
"'the burden shifts immediately to the petitioner to establish a valid
defense to the summons.'" Knauss v. United States, 28 F.Supp.2d 1252,
1254 (S.D.Fla. 1998) (quoting Cosme, 708 F.Supp. at 48); Conrad v.
United States, 1989 WL 165576, *1 (W.D.Mich. Nov 09, 1989); Deleeuw
v. I.R.S., 681 F.Supp. 402 (E.D.Mich. 1987); Jungles v. United
States, 634 F.Supp. 585, 586 (N.D.Ill.1986).
A declaration from the agent or office is necessary if filing a
counterclaim for enforcement, and may be appropriate to rebut allegations
asserted in the petition to quash. It is important to respond as quickly as
possible so that the IRS's examination is not unduly delayed.
C. DISCOVERY AND EVIDENTIARY HEARINGS
Most summons enforcement proceedings should be decided on the papers,
except for the very rare case where the party opposing enforcement has
established the existence of a question as to a material fact. Discovery
thus is rarely appropriate in summons proceedings, and evidentiary hearings
are also rare.
- Limitations on discovery
- The summary nature of summons proceedings limits the circumstances under
which discovery is available. United States v. Stuart, 489 U.S. 353,
369 (1989) (quoting S. Rep. No. 97-494, vol. 1, at 285 (1982), reprinted
in 1982 U.S.C.C.A.N. 781, 1031. Discovery is rarely appropriate in
summons cases. See United States v. Kis, 658 F.2d 526, 540 (7th Cir.
1981); Chen Chi Wang v. United States, 757 F.2d 1000, 1004 (9th Cir.
1985); United States v. Will, 671 F.2d 963, 967-68 (6th Cir. 1982).
In order for discovery to occur, a taxpayer must make "a substantial
preliminary showing that enforcement of the summons would result in an abuse
of the court's process" and that "discovery would likely lead to useful,
relevant evidence." Robert v. United States, 364 F.3d 988, 999-1000
(8th Cir. 2004).
- When respondents seek an opportunity to propound formal discovery
requests they often have the real and improper objective of trying to shift
the court's focus from the Powell standard to a critique of the IRS's
investigative techniques. This is not a proper inquiry for a summons
enforcement proceeding. Tiffany Fine Arts, Inc. v. United States, 469
U.S. 310, 323 (1985).
- "[I]t is for the agency, and not the taxpayer, to determine the course
and conduct of an audit, and 'the judiciary should not go beyond the
requirements of the statute and force IRS to litigate the reasonableness of
its investigative procedures.'" United States v. Norwest Corp., 116
F.3d 1227, 1233 (8th Cir. 1997) (quoting United States v. Clement,
668 F.2d 1010, 1013 (8th Cir. 1982)).
- Sometimes respondents couch their requests for discovery in terms of
seeking to determine whether the summons was issued for an improper purpose.
The Court in Powell clearly did not intend to permit taxpayers to use
the "improper purpose" exception as a pretext for litigating the wisdom of
the IRS's investigatory techniques. The mere allegation of improper purpose
is not sufficient to justify discovery. See United States v.
Ladd, 471 F. Supp. 1150, 1153 n.3 (N.D. Tex. 1979) (no prehearing
discovery when taxpayer failed "to include circumstances upon which her
claim of improper purpose was based"). When the purported purpose of a
discovery request is to inquire into the motivation for an audit, the movant
must show "extraordinary circumstances" that set them apart from any other
taxpayer. United States v. Judicial Watch, Inc., 371 F.3d 824,
830-31 (D.C. Cir. 2004) (quoting SEC v. McGoff, 647 F.2d 185, 193
(D.C. Cir. 1981)).
- Indeed, some courts have held that they will not decide whether
discovery should be allowed until after an evidentiary hearing is held.
United States v. Harris, 628 F.2d 875, 882 (5th Cir. 1980) (citing
with approval United States v. Salter, 432 F.2d 697 (1st Cir. 1970)
(discovery should be allowed in summons enforcement proceedings only after
the court has heard cross-examination of agent at the evidentiary hearing
and determines that further discovery is necessary); United States v.
McCarthy, 514 F.2d 368 (3d Cir. 1975); United States v. Church of
Scientology, 520 F.2d 818 (9th Cir. 1975); United States v.
Abrahams, 905 F.2d 1276 (9th Cir. 1990); United States v. Lask,
703 F.2d 293 (8th Cir. 1983); Kis, 658 F.2d at 542.
- Evidentiary Hearings
- Summons enforcement proceedings are intended to be summary in nature
with the sole purpose of insuring "that the IRS has issued the summons for a
proper purpose and in good faith." United States v. BDO Seidman, 337
F.3d 802, 810 (7th Cir. 2003). Because summonses are issued during the
investigative stage, no guilt or liability on the part of the taxpayer need
be established. "The summons power 'is not a power to procure or perpetuate
evidence at all; it is strictly inquisitorial.'" PAA Mgmt., Ltd. v.
United States, 962 F.2d 212, 219 (2d Cir. 1992) (citation omitted).
See also United States v. Mueller,930 F.2d 10, 12 (8th Cir. 1991)
(taxpayer "could not use the proceedings to enforce the IRS summons as a
forum in which to contest the validity of the underlying assessments").
Accordingly, "the enforcement proceeding should be concluded expeditiously
so that the actual investigation can be continued." Barrett, 837 F.2d
at 1349. "[C]ourts have recognized that a proceeding to enforce a tax
summons is a most appropriate candidate for streamlined procedures."
United States v. McCoy, 954 F.2d 1000, 1004 (5th Cir. 1992).
- While a district court may, in its discretion, allow the taxpayer an
evidentiary hearing to substantiate his allegations and supplement offers of
proof that the summons was not issued in good faith, the "right to an
adversary hearing ... is not absolute." United States v.
Harris, 628 F.2d 875, 879 (5th Cir. 1980). "There is no requirement
that the court conduct [an evidentiary] hearing or permit discovery in each
and every case. ... [A] party challenging IRS summonses will be
entitled to an adversary hearing only upon the production of some
substantive evidence corroborating the claim of abuse." Hintze v.
IRS, 879 F.2d 121, 126-27 (4th Cir. 1989). See also United States v.
BDO Seidman, 337 F.3d 802, 809 (7th Cir. 2003); Fortney v. United
States, 59 F.3d 117, 121 (9th Cir. 1995); Copp v. United States,
968 F.2d 1435, 1438 n.1 (1st Cir. 1992); Alphin v. United States, 809
F.2d 236, 238 (4th Cir. 1987); United States v. Balanced Fin. Mgmt.,
Inc., 769 F.2d 1440, 1444 (10th Cir. 1985); United States v. Tiffany
Fine Arts, Inc., 718 F.2d 7, 14 (2d Cir. 1983), aff'd, 469 U.S.
310 (1985); United States v. Kis, 658 F.2d 526, 539 n.39 (7th Cir.
1981); United States v. Nat'l Bank of South Dakota, 622 F.2d 365, 367
(8th Cir. 1980).
D. THE ROLE OF MAGISTRATE JUDGES
A magistrate judge does not have authority to render a final decision in
a summons case. A magistrate judge's powers are enumerated in Section
636(a) of Title 28, and include procedural pretrial matters. Magistrate
judges do not have authority to make a final determination on motions for
judgment on the pleadings, for summary judgment, or other dispositive
motions. 28 U.S.C. § 636(b)(1)(a). A summons proceeding is not a
procedural pre-trial motion, and the respondent in a summons enforcement
proceeding or petitioner who seeks to quash a summons is entitled to a
determination by an Article III judge. See Peretz v. United
States, 501 U.S. 923, 930-32 (1991). A summons enforcement order is a
final dispositive and appealable order, Reisman v. Caplin,375 U.S.
440, 449 (1964), beyond the authority of a magistrate judge to issue.
United States v. First Nat'l Bank, 628 F.2d 871, 873 (5th Cir. 1980);
United States v. Wisnowski, 580 F.2d 149 (5th Cir. 1978).
Proceedings may be conducted by a magistrate judge with the consent of
both parties. While reference to a magistrate judge for report and
recommendation, with a de novo determination by a district judge, satisfies
the constitutional requirements, a final decision by a magistrate judge
absent consent of the parties, does not. See Flournoy v.
Marshall, 842 F.2d 875, 878 (6th Cir. 1988); Fowler v. Jones, 899
F.2d 1088, 1093 (11th Cir. 1990). An appeal from an "order" issued by a
magistrate judge, absent consent of the parties, enforcing a summons will be
subject to dismissal on the grounds that the order is not final. United
States v. Jones,581 F.2d 816, 817 (10th Cir. 1978). See also
Colorado Bldg. & Constr. Trades Council v. B.B. Andersen Constr. Co.,879
F.2d 809, 811 (10th Cir. 1989). When a magistrate judge mistakenly issues
an "order" or "decision" rather than a report and recommendation, the
attorney should ask the district judge to construe the magistrate judge's
ruling as a report and recommendation that the district court enter an order
enforcing the summons.
E. "JOHN DOE" SUMMONS PROCEDURES
A "John Doe" summons may be served only with judicial approval. I.R.C.
§ 7609(f). These cases are always handled by the Tax Division,
and the Deputy Assistant Attorney General, Tax Division, should approve the
suit before it is filed.
Similar to a suit to enforce a summons, a suit seeking authorization to
serve a John Doe summons is initiated by filing a petition and a
declaration. The forms included in this manual contain suggested language.
They may require modification to conform with local rules and practices.
A petition [Exhibit 9] provides the jurisdictional grounds
for the suit, asserts the underlying facts, and provides a request for
relief. Fed. R. Civ. P. 8. It also demonstrates satisfaction of the
statutory requirements of § 7609(f).
A declaration [Exhibit 10] must be submitted with the
petition. It is a sworn statement putting forward the facts that establish
the criteria necessary for a court to approve service of the summons: (1)
that the summons relates to the investigation of a particular person or
ascertainable group or class of persons; (2) that there is a reasonable
basis for believing that such person or group or class of persons may fail
or may have failed to comply with any provision of any internal revenue law;
and (3) that the information sought to be obtained from the examination of
the records or testimony (and the identity of the person or persons with
respect to whose liability the summons is issued) is not readily available
from other sources. I.R.C. § 7609(f).
A proceeding seeking the court's authorization to serve a John Doe
summons is ex parte. Thus, the matter is ripe for the court's consideration
as soon as it is filed. Filing a notice [Exhibit 13] calling
that fact to the attention of the court is recommended.
Finally, a proposed order [Exhibit 12] should be submitted
for the court's execution.
F. APPEAL PROCEDURES
All appeals in summons cases—whether or not adverse—will be
handled by the Appellate Section of the Tax Division. Exceptions to this
policy must be approved by the Assistant Attorney General of the Tax
Division. See
U.S.A.M. § 6-5.230.
If the court does not fully enforce the summons, the order is considered
adverse. The Chief of the appropriate Civil Trial Section should be
notified of adverse summons-related decisions as soon as practicable.
Id.
- Civil Trial Section, Central, Seth G. Heald, Chief
- Civil Trial Section, Northern, Patrick D. Mullarkey, Chief
- Civil Trial Section, Eastern, David A. Hubbert, Chief
- Civil Trial Section, Southern, Michael J. Kearns, Chief
- Civil Trial Section, Southwestern, Louise P. Hytken, Chief
- Civil Trial Section, Western, Richard R. Ward, Chief
When a case is decided in favor of the Government, the United States
Attorney should furnish the Tax Division with a copy of a notice of appeal
or cross-appeal filed by an adverse party as soon as possible (preferably
within 5 days of the filing of the notice). See
U.S.A.M. § 6-5.700. DOJ
trial attorneys should consult with their managers to ensure than the
correct actions and procedures are taken.
FN 1. If the summoned party's refusal is willful, he may also be prosecuted
under I.R.C. § 7210. See United States v. Becker,
259 F.2d 869 (2d Cir. 1958) (affirming a conviction for violating Section
7210, where the defendant had willfully and knowingly neglected to produce
certain of the books and papers called for under a summons issued by an IRS
special agent); see also, Reisman v. Caplin, 375 U.S. 440, 446
(1964) ("any person summoned who 'neglects to appear or to produce' may be
prosecuted under § 7210"). Similarly, if the summoned party
wholly makes default or contumaciously refuses to comply, he may be subject
to sanctions under I.R.C. § 7604(b), including arrest and
punishment for contempt. See Reisman, 375 U.S. at 448. Indeed, when
a Section 7604(b) complaint is filed, "[i]f the taxpayer has contumaciously
refused to comply with the administrative summons and the Service fears he
may flee the jurisdiction, application for the sanctions available under
§ 7604(b) might be made simultaneously with the filing of the
complaint." United States v. Powell, 379 U.S. 48, 58 n.18 (1964).
But see Schulz v. IRS, 395 F.3d 463, reh'g granted, 413 F.3d 304
(2d Cir. 2005) (without citing or discussing Becker, holding that a
summoned party cannot be held in contempt or subjected to indictment under
Section 7210 absent an enforcement order.)
FN 2. Pub. L. No. 98-549, 98 Stat. 2779.
FN 3. The Senate report states that "[t]he phrase 'to collect personally
identifiable information' covers the various ways that individuals can be
identified, including name, address, and social security number." S. Rep.
No. 98-67, at 28 (1984). The cognate House report, paraphrasing the
statute, states that "'personally identifiable information' ... would
include specific information about the subscriber, or a list of names and
addresses on which the subscriber is included, but does not include
aggregate information about subscribers which does not identify particular
persons." H.R. Rep. No. 98-934, at 79 (1984), reprinted in 1984
U.S.C.C.A.N 4655, 4716.
FN 4. Exceptions are also made if the disclosure is necessary to render (or
conduct a legitimate business activity related to) a service to the
subscriber (Section 551(c)(2)(A)), the disclosure is of the subscriber's
name and address to any cable or other service, provided certain conditions
are satisfied (Section 551(c)(2)(C)), or the disclosure is to a government
entity as authorized under chapters 119, 121, or 206 of Title 18, provided
the disclosure does not reveal the subscriber's selection of video
programming (Section 551(c)(2)(D)).
FN 5. In United States v. Zolin, 491 U.S. 554 , 561(1989), the
Supreme Court found itself "evenly divided with respect to the issue of the
power of a district court to place restrictions upon the dissemination by
the IRS of information obtained through a § 7604 subpoena action"
and therefore affirmed the judgment of the Court of Appeals for the Ninth
Circuit, insofar as it upheld the district court's conditional-enforcement
order. Such an affirmance is not binding in other cases, see Hertz v.
Woodman, 218 U.S. 205, 213-14 (1910), and the Ninth Circuit later
reversed its Zolin decision in Jose, 131 F.3d at 1329.
FN 6. In Becker v. United States, 451 U.S. 1306 (1981), the taxpayers
offered to post a supersedeas bond and argued they were entitled under Rule
62(d) to a stay of an IRS summons enforcement order pending appeal to the
Ninth Circuit. Chief Justice Rehnquist, acting as Circuit Justice, issued
an order in which he granted a temporary stay in order to allow the full
Court to consider the issue of Rule 62(d)'s availability. But the full
Court did not take up the issue and the stay was lifted. See 452
U.S. 935.
FN 7. One California court (in an unpublished ruling) held that the 20-day
period can be subject to equitable tolling. Mackenzie v. United
States, 84 A.F.T.R.2d (RIA) 6725, 6726-27 (E.D. Cal. 1999). In so doing,
it relied on Irwin v. Dep't of Veterans Affairs, 498 U.S. 89 (1990).
Subsequently, the Supreme Court considered whether the statute of limitation
for refunds suits could be equitably tolled in light of Irwin, and
held that equitable tolling did not apply. United States v.
Brockamp, 519 U.S. 347 (1997). An analogous argument can be made with
respect to the 20-day filing requirement to quash a summons.
FN 8. In Richard A. Vaughn, DDS, P.C. v. Baldwin, 950 F.2d 331 (6th
Cir. 1991), the court concluded that the Fourth Amendment applied to the
IRS's retention of records voluntarily turned over in response to a summons
once that consent was withdrawn. Once consent is withdrawn, the United
States must obtain a court order. See also, Linn v. Chivatero, 714
F.2d 1278, 1284 (5th Cir. 1983); Mason v. Pulliam, 557 F.2d 426 (5th
Cir. 1977).
FN 9. Before the 1998 IRS reorganization, the CIC program was called the
coordinated examination program (CEP). CIC is the successor to CEP.
FN 10. This statutory requirement was added after the decision in United
States v. Derr, 968 F. 2d 943 (9th Cir. 1992), which held that the
examining agent had the authority to issue a designated summons.
[updated February 2007]
[cited in USAM 6-1.130]
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