A couple years ago, I wrote a post about the efforts of the IRS to assist the Danish tax agency to collect from a taxpayer in the United States. That case involved a levy on the taxpayer’s assets. Recently, another one of the five countries that have collection treaties with the IRS had an opinion issued based on the efforts of the IRS to assist it in collecting taxes due to France. In the case of Hanse v. United States, No. 1:17-cv-04573 (N.D. Ill. March 5, 2018), the court analyzes the treaty provisions in the context of a summons enforcement case. The application of the summons laws in this case results in an order that the information sought be provided to the IRS/France.
I wrote a post almost four years ago on the failure of tax administration to negotiate collection provisions into every tax treaty and not just have it in five treaties that happen to have been written at a time when someone thought this was a good idea. In a global economy, it still seems like a good idea. We have passed laws seeking to ensure that we know about the income of U.S. citizens around the world and leaned on other countries to cooperate in helping the IRS know of the income. To complement that effort, the IRS needs to have the treaty tools to collect when assets exist overseas and it cannot obtain personal jurisdiction over the taxpayer. The absence of collection language in our tax treaties makes it difficult, and at times impossible, for the IRS to collect from taxpayers who park their assets in the vast majority of countries since the IRS lacks a mechanism for reaching those assets.
France is investigating the potential wealth tax and income tax liabilities of Mr. Hanse for the years 2013-15. The French tax authorities sent to the IRS an exchange of information request seeking information in connection with its investigation. France particularly wanted information about two transfers by Mr. Hanse totaling over 500,000 €. The request stated that Mr. Hanse was a French citizen and that the French tax authorities had exhausted the remedies domestically available for gathering the information. The IRS did not have the information requested. The U.S. competent authority determined that the request was proper under the treaty provisions. So, the IRS served a summons on the party to whom the funds were transferred, a third party in the US, and sent notice to the taxpayer at the address provided by the French authorities.
The taxpayer timely filed a petition to quash the summons raising three objections: 1) the IRS failed to comply with the administrative steps necessary for a valid summons under the IRC because it contacted third parties without providing advanced notice under IRC 7602(c)(1); 2) France could not obtain the information through its own laws so it should not use the treaty to accomplish what it could not do if this were an entirely domestic situation; and 3) the summonsed party is a law firm and some of the materials requested by the summons required protection from disclosure by the attorney client privilege.
The IRS moved to dismiss and attached to its motion affidavits from the competent authority and the revenue agent serving the summons. The court decided to treat this as a motion for summary judgment which is normal in most contexts, though not as normal in a summary proceeding such as a summons enforcement.
Before addressing the first argument, the court notes that the IRS must meet the four elements of the Powell test. We have discussed those elements before. A similar notice argument was addressed in a recent post written by Les. The court notes that the burden on the IRS with respect to the summons remains the same whether the summons involves a “normal” U.S. taxpayer or is done at the request of a treaty partner. Here, the court finds that the affidavits allow the IRS to meet its burden under the Powell test, which it acknowledges is not a heavy burden.
Good Faith of French Investigation
The taxpayer argues that French law would not allow the French authorities to obtain the information sought through the summons and, therefore, those authorities should not circumvent French law and obtain the information just because the U.S. laws do permit the gathering of the information. The court takes this as a challenge to the “legitimate purpose” element of the Powell test. This is where a treaty summons gets a little interesting. Looking at prior case law involving other treaty summonses issued on behalf of France, the court finds that to satisfy the Powell test it need not look at the good faith of the treaty partner but only at whether the IRS acted in good faith in issuing the summons. Since the taxpayer did not challenge whether the IRS issued the summons in good faith and the court saw no indication of bad faith, it finds that this challenge fails.
Compliance with IRC
Petitioner challenges the issuance of a summons to a third party where the IRS has not provided the taxpayer with a notice pursuant to IRC 7602(c)(1). We have written very little about IRC 7602(c), which is a provision that came into the code in the 1998 Restructuring and Reform Act. Les addressed it in an earlier post and notes at least one case that has held the taxpayer should receive specific notice of contact of third parties. Most issues involving this code section, which requires the IRS to notify taxpayers before it contacts thirds parties about them looking for information, concern the IRS position that Pub 1 generically informs them of the possibility that the IRS might do this (thus satisfying the statutory requirement) versus the need, in the view of some taxpayers, for the IRS to specifically tell them who it intends to contact.
Here, the IRS neither generically nor specifically informed the taxpayer of its intent to contact a third party by serving the summons. The taxpayer argues that this failure makes the summons unenforceable. The IRS argues that the protection of IRC 7602(c) does not extend to the taxpayer because it “does not include the liability for any tax imposed by any other jurisdiction.” 26 C.F.R. 301.7602-2(c)(3)(C). The court agrees with the IRS. This creates an interesting exception for taxpayers whose summons cases arise under treaty language
Attorney Client Privilege
I recently wrote on another summons case in which the taxpayer sought to keep the IRS from information based on the attorney-client privilege. The court here notes that a blanket assertion of attorney-client privilege does not work and that the taxpayer needs to assert the privilege on a document by document basis. Because the taxpayer did not support the privilege claim with “any facts from which the Court could find a privilege attaches to the documents that are requested in the summons” the court rejects his privilege argument.
Some aspects of the treaty summons differ from a “normal” summons in their application because of the interplay of the code with non-US taxpayers. Here, the summons gets enforced and presumably France gets the information it needs in order to move forward with its tax investigation. Only a handful of these cases have been reported, suggesting either that countries do not need to resort to the treaty very often in order to complete their investigations or that investigators do not use this tool as effectively as they might. As the global economy continues to push through borders, we should expect more of these cases and there could be many more if we negotiated different treaty language regarding collection.