DOJ Opposes State Insurance Agency’s Attempt to Block IRS Summons

UNITED STATES OF AMERICA,
Petitioner,
v.
DELAWARE DEPARTMENT OF INSURANCE,
Respondent.

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF DELAWARE

UNITED STATES OF AMERICA'S OPPOSITION TO RESPONDENT'S PETITION TO QUASH OR IN THE ALTERNATIVE MOTION FOR PROTECTIVE ORDER

Date: February 24, 2021

DAVID A. HUBBERT
Acting Assistant Attorney General

DAVID C. WEISS
United States Attorney

WARD W. BENSON
KYLE L. BISHOP
Trial Attorneys, Tax Division
U.S. Department of Justice
P.O. Box 227, Ben Franklin Station
Washington, DC 20044
Tel: (202) 514-9642
Fax: (202) 514-6866
Email: ward.w.benson@usdoj.gov

On the same day the Delaware Department of Insurance (“DDOI”) filed its response to the order to show cause in this case, it also filed a petition to quash the summons, or in the alternative, motion for a protective order. (D.I. 16). The Court should summarily deny both requests.

I. The law does not permit the respondent to file a petition to quash.

The law allows, in limited circumstances, the filing of a petition to quash a summons issued to a third party.¹ The Internal Revenue Code provides that only persons “entitled to notice of a summons” shall “have the right to begin a proceeding to quash such summons not later than the 20th day after the day such notice is given.” 26 U.S.C. § 7609(b)(2)(A). Here, the DDOI is the third party, and Artex and Tribeca are the persons entitled to notice. To commence a petition to quash, that person must “mail by registered or certified mail a copy of the petition to the person summonsed and to such office as the Secretary may direct in the notice” provided to that party. 26 U.S.C. § 7609(b)(2)(B).

The above-cited provisions detail at least three requirements that a party must meet to file a petition to quash an IRS summons of a third party: (1) the party must be one who had the right to notice under 26 U.S.C. § 7609(a); (2) the proceeding must be brought within 20 days of the date such notice is given; and (3) the petition must be sent to the IRS by registered or certified mail. 26 U.S.C. § 7609(b)(2)(A-B). Because the DDOI's petition to quash fails each of these, the Court should dismiss it.

A. The DDOI is not entitled to notice of the summons issued in this case.

Only persons entitled to receive notice of a summons may file a petition to quash. 26 U.S.C. § 7609(b)(2)(A). The Internal Revenue Code provides that “any person” who is “identified” in the summons, “other than the person summonsed,” is entitled to be given notice of a third-party summons. 26 U.S.C. § 7602(a)(1) (emphasis added). Thus, by the statute's plain terms, the summonsed party — in this case, the DDOI — is not entitled to notice. This fact alone dooms the petition to quash. Only a person who is entitled to notice may file a petition to quash. The DDOI had no such right. As such, it may not file its petition.²

B. The DDOI did not initiate this proceeding within 20 days of the date it received notice.

As noted above, the DDOI had no right to notice of the summons. Because the DDOI was not entitled to receive notice, it could not file a petition within 20 days of being given that notice. Moreover, the even if service of the summons itself were the notice contemplated by the statute, the DDOI's suit is untimely. The DDOI learned of the summons at issue in this case through personal service of the summons in October 2017. (D.I. 15 at ¶ 15 (admitting an IRS employee “served an attested copy of the summons by hand delivery” on the Department in October 2017)). Because the DDOI did not initiate this proceeding within 20 days of that date, the Court lacks jurisdiction to hear the petition for this reason as well. See, e.g., Callahan v. Schultz, 783 F.2d 1543, 1545 (11th Cir. 1986) (“strict compliance” with 20-day rule required to bring petition to quash); Shisler v. United States, 199 F.3d 848, 852 (6th Cir. 1999) (20-day rule is jurisdictional); Faber v. United States, 921 F.2d 1118, 1119 (10th Cir. 1990) (same).

C. The DDOI did not timely mail a copy of the petition by certified or registered mail to the Secretary of the Treasury.

Lastly, the DDOI does not allege that it mailed notice of the petition to quash to the Secretary of the Treasury within 20 days of being given notice of the summons. 26 U.S.C. § 7602(b)(2)(B). This failure also deprives the Court of jurisdiction over the petition to quash. See, e.g., Dorsey v. United States, 618 F. Supp. 471, 474 (D. Md. 1985); Fogelson v. United States, 579 F. Supp. 573, 574 (D. Kan. 1983).

II. This Court should not condition the enforcement of an IRS summons on terms set forth by the DDOI.

The DDOI also seeks a protective order from this Court “until such time as the IRS complies with the dictates of Delaware Law by obtaining consents or agreeing in writing to keep the requested information confidential.” (D.I. 19 at 20). Functionally, this seeks to condition any enforcement of the summons on the Court imposing a protective order on the United States. As a general matter, case law holds that the law should not allow conditional enforcement of a summons. And it should not grant the particular relief the DDOI seeks here.

“The sole purpose” of a summons enforcement proceeding “is to ensure that the IRS has issued the summons for a proper purpose and in good faith.” United States v. Barrett, 837 F.2d 1341, 1349 (5th Cir. 1988) (en banc) (per curiam) (citing United States v. Powell, 379 U.S. 48, 57-58 (1964)); see also United States v. Jose, 131 F.3d 1325, 1329 (9th Cir. 1997) (en banc) (agreeing with Barrett); but see United States v. Rockwell Intern., 897 F.2d 1255, 1261 (3d Cir. 1990) (stating conditional enforcement of IRS summons permitted, but not allowing conditional enforcement in that particular case).³

Because a prerequisite of any conditional enforcement is the IRS satisfying the Powell factors in this case (which, it has), it would occur against a backdrop where the Court has ruled that the IRS issued the summons for a proper purpose and in good faith. Powell, 379 U.S. at 57-58 (only authorizing enforcement of summons if IRS issued it in good faith and for a proper purpose). Therefore, under the persuasive authority of Barrett and Jose, enforcement should occur without conditions.

Even if this Court follows Rockwell in determining it has the power to order conditional enforcement of an IRS summons, that does not mean it should exercise that power here. Indeed, the Rockwell court reversed a district court for ordering conditional enforcement of an IRS summons, notwithstanding its acknowledgement that district courts have the authority to condition enforcement in certain (unnamed) instances. Rockwell, 897 F.2d at 1261-1263.

Furthermore, conditional enforcement on the terms the DDOI seeks would reduce (if not eliminate) the utility of any enforcement of this summons. The DDOI asks this Court to issue an order that only allows the IRS to use this information (including in any court proceedings) subject to the explicit permission of either the insured (who may be implicated in their own tax troubles by disclosure of this information) or the DDOI.

The DDOI itself has tried to obtain such consent from the taxpayers, yet less than ten percent agreed to those requests. (See, e.g., D.I. 15 at ¶ 8 (acknowledging only 19 of the 225 entities associated with Artex or Tribeca that received certificates of authority provided consent forms to the DDOI despite its efforts to obtain them)). There is no reason to suspect these entities will be more responsive to a request from the IRS than they were to multiple entreaties from the DDOI.

The requested protective order would allow the DDOI to dictate to the United States whether it can use the information obtained in this summons enforcement proceeding in an examination or case involving Artex or Tribeca. There is no legal or policy rationale that supports allowing the DDOI to interpose itself between the federal government and a taxpayer the IRS is investigating for possible federal tax liabilities.⁴

Moreover, any concerns about confidentiality asserted by the DDOI are misplaced. The United States remains subject to the strictures of section 6103. 26 U.S.C. § 6103. That law ensures that “[r]eturns and return information,” which includes “any” data “collected by the Secretary with respect to the determination” of liability under the Internal Revenue Code, shall be held confidentially. 26 U.S.C. § 6103(a), (b)(2)(A). That statute provides limited exceptions set forth by Congress that allow the federal government to exchange information appropriately and to bring tax cases in court. See, e.g., 26 U.S.C. § 6103(h)(2) (allowing transmittal to Department of Justice in matters “involving tax administration”). Congress has already balanced the privacy interests of taxpayers against the interests of the federal government in using information it collects to bring appropriate actions against those taxpayers. There is no justification for the DDOI to demand that this Court add additional restrictions.

Lastly, a protective order would only be appropriate, if at all, if the DDOI could show that it was necessary “to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.” Fed. R. Civ. P. 26(c).⁵ The DDOI's motion does not set forth this standard, and nowhere does it articulate what “annoyance, embarrassment, oppression, or undue burden or expense” might arise if the Court does not grant the motion. Certainly, information sought by the IRS might be damaging to Artex and its clients, since it may implicate them in tax avoidance or evasion schemes, but that is not the kind of harm protective orders were intended to prevent. For this independent reason, the Court should deny the DDOI's request.

III. Conclusion.

The law does not permit the DDOI (as the summonsed entity) to file a petition to quash. Nor should this Court permit the DDOI (or insurance companies and the promoters of abusive tax shelters) to dictate to the federal government how it uses any information it obtains from this summons beyond the limits provided by 26 U.S.C. § 6103. Finally, the DDOI has not demonstrated entitlement to a protective order. For these reasons, the Court should deny the petition to quash and motion for a protective order.

Date: February 24, 2021

WARD W. BENSON
U.S. Department of Justice
P.O. Box 227, Ben Franklin Station
Washington, DC 20044
Tel: (202) 514-9642
Fax: (202) 514-6866
Email: ward.w.benson@usdoj.gov