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Polselli v US: Circuit Split on Notice Rules For Summonses to Aid Collection

Posted on Jan. 20, 2022

The recent Sixth Circuit case Polselli v United States results in a split in the circuits on a fundamental issue in IRS summons practice: does the IRS have to give notice when it issues a summons in the aid of collecting an assessed tax? Polselli involves IRS summonses issued to third party recordkeepers relating to bank accounts of a delinquent taxpayer’s spouse, a management company affiliated with the taxpayer, and the taxpayer’s lawyer. The taxpayer owed over $2 million dollars to the IRS stemming from a decade long pattern of underpaying taxes, and the summonses were part of the IRS’s efforts to see if the taxpayer had been shifting assets to avoid collection.

Under a careful but dense statutory scheme, when IRS serves a third party summons, the IRS is supposed to notify the party whose information is being sought. The statutory rules about notice differ depending on the circumstances, including the nature of the underlying matter (e.g., exam versus collection).

In Polselli, the tax delinquency attracted the attention of a revenue officer, who believed that the taxpayer had transferred assets to family members and perhaps related entities to make collection less likely.

The revenue officer issued a summons on a bank. The summons sought bank account and financial records of the wife Hanna and the management company that concerned the taxpayer. The Revenue Officer also served Polselli’s law firm Abraham & Rose with a summons. After the law firm asserted attorney-client privilege, the Revenue Officer issued summonses against two other banks. Those summonses also sought financial records relating to the law firm that related to the taxpayer. The Revenue Officer did not notify the wife or the law firm of these bank summonses.

After the banks (but not the IRS) notified Hanna and Abraham & Rose that the IRS had issued the summonses, Hanna and the firm filed separate petitions to quash the summonses in district court. In their petitions to quash they alleged that the IRS failed to notify them under Section 7609(a).

In general, under Section 7609(a), when the IRS serves a summons on a third-party recordkeeper the IRS must give notice to “any person . . . who is identified” in such a summons within three days of issuing the summons to the third-party recordkeeper. The right to receive notice is the ticket to the government’s waiver of sovereign immunity; absent the right to notice under 7609(a) there is no waiver and thus no way to get into court.

The government argued that Hanna and the law firm were not entitled to notice because the summonses were issued “in aid of the collection” of Polselli’s assessed liability. The government based its argument on the plain language of Section 7609(c)(2)(D)(i), which excludes from the general 7609(a) notice requirements a summons issued “in aid of the collection” of “an assessment . . . against the person with respect to whose liability the summons is issued.”

Under the government’s reading, the absence of Hanna and the law firm’s right to notice from the IRS meant that sovereign immunity barred the suit.

In responding to the government’s motion to dismiss, Hanna and the law firm claimed that the government was taking a “hyperliteral” reading of the statute and asked the court to apply 2000 Ninth Circuit precedent in Ip v. United States.

Ip narrowly applied the “in aid of the collection” exception only if (1) “the third party is the assessed taxpayer,” (2) “the third party is a fiduciary or transferee of the taxpayer,” or (3) “the assessed taxpayer has ‘some legal interest or title in the object of the summons.’”

After a government win at the district court, the petitioners appealed, and the Sixth Circuit affirmed:

We agree with the district court that the summonses at issue fall squarely within the exception listed in § 7609(c)(2)(D)(i). That section unequivocally provides that the IRS may summon the third-party recordkeeper of any person without notice to that person if (1) an assessment was made or a judgment was entered against a delinquent taxpayer and (2) the summons was issued “in aid of the collection” of that delinquency. We hold that as long as the IRS demonstrates that these conditions are satisfied, it may issue a summons to a third-party recordkeeper without notice to the person or entity identified in the summons.

In rejecting the Ninth Circuit’s reading of the statute, the Sixth Circuit noted that the Tenth and Seventh circuits had read the in aid of the collection exception without any of limitations. See Davidson v. United States, 149 F.3d 1190 (Table), 1998 WL 339541 (10th Cir. 1998) and Barmes v. United States, 199 F.3d 386 (7th Cir. 1999).

For Those Wanting A Deeper Dive

Why did the Sixth Circuit part ways with the Ip approach?

The Ninth Circuit approach essentially read additional conditions into the blanket statutory exception to notice when a summons is issued in the collection process.  As Polselli explained,

[in Ip the Ninth Circuit] “examined § 7609’s legislative history and concluded that the statute’s stated purpose was generally to facilitate notice to taxpayers and to enable them to challenge summonses in district court. Because it assumed that Congress would not have allowed the IRS to summon a third-party recordkeeper for the information of any person without notice, the Ninth Circuit held that the notice exception applies “only where the assessed taxpayer ‘has a recognizable [legal] interest in the records summoned.’” Id. at 1176 (quoting Robertson v. United States, 843 F. Supp. 705, 706 (S.D. Fla. 1993)) (alteration in original).

The Ninth Circuit also felt that the literal reading of 7609(c)(2)(D)(i) rendered the notice exception of 7609(c)(2)(D)(ii) as superfluous, which in its view cut against the government’s literal reading of the (i) exception. The exception under (ii) applies to a summons issued in aid of the collection of “the liability at law or in equity of any transferee or fiduciary of a person referred to” in the 7609(c)(2)(D)(i) exception. As the majority opinion in Polselli acknowledged “transferee and fiduciary liability are indeed derivative of the taxpayer’s assessment” so the parties were correct in asserting that there could not be transferee liability without an underlying taxpayer assessment. Yet the Polselli court felt there was space between the two clauses in 7609(c)(2)(D)(i) and (ii) as the efforts to collect against a taxpayer are “legally and procedurally distinct from their collection efforts of the transferee’s or fiduciary’s liability—which liability must be rooted in state law.”

In rejecting Ip, the Sixth Circuit stated that it declined to follow the literal language only when following it would lead to an absurd result or an outcome that is inconsistent with the legislative intent. Given the above and language in the legislative history that suggested that Congress struck the balance between privacy and IRS ability to collect the majority declined to read any extrastatutory condition into when IRS was provided to give notice for a summons issued for collection purposes. While it noted that it “was sympathetic to worries that the IRS may be able to access information regarding blameless third parties without notice” the sympathy was insufficient to overcome the statutory language.

There is brief dissent that would have adopted the Ip approach. The dissent noted that the summonses were “a significant intrusion upon the privacy of those account holders. Cf. U.S. Const. Amend. IV (“The right of the people to be secure in their . . . papers . . . against unreasonable searches and seizures, shall not be violated”).” The dissent poked holes in the majority opinion’s finding space between the 7609(c)(2)(D)(i) and 7609(c)(2)(D)(ii) exceptions:

I think the only way to give concrete meaning to §§ 7609(c)(2)(D)(i) and (D)(ii), and to avoid the “vitiation” of §§ 7609(a) and (b), is to read “in aid of collection of” more narrowly than it would ordinarily be read. In the context of all these provisions, rather, I think we must read that phrase to require a more direct connection between the summons and the “collection” of the liability of the persons described in §§ 7609(c)(2)(D)(i) and (D)(ii). Specifically, I agree with the Ninth Circuit that a summons has this more direct connection with the collection of those persons’ liability “only where the assessed taxpayer[,]” in the case of § 7609(c)(2)(D)(i), or a fiduciary or transferee, in the case of § 7609(c)(2)(D)(ii), “has a recognizable legal interest in the records summoned.” 205 F.3d at 1176 (cleaned up). In this case we must either maul the bulk of § 7609 or read narrowly one phrase within it.

To be sure, the dissent acknowledges that the majority view has merit, stating the “the Ninth Circuit’s interpretation, in my view, is the least bad interpretation available to us here.” For now, there is a clean split in the circuits on this issue, and Polselli is likely not the last word.

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