on Mar 28, 2023
at 2:11 pm
Tax season is upon us, and for many, April 15 is a date looming on the horizon as the traditional deadline for dispatching yet another check payable to the United States Treasury. Taxpayers who cannot pay on time (or consciously resist the government’s efforts to collect the money that they owe) may ultimately find themselves wrestling with a host of IRS collection devices, including the administrative summons. Unlike the relatively polite “information document request,” which is routinely employed during IRS audits, an administrative summons requires the recipient to provide the requested information or face enforcement in federal court. Moreover, in the wake of a formal assessment of tax (rendering it due and payable), the IRS has the power to pursue tax collection by issuing an administrative summons to a third party, such as the taxpayer’s bank, and it may do so without providing notice of the summons to the taxpayer. That reality should come as no surprise. But may the IRS do the same for accounts held by the taxpayer’s family members – his spouse, parents, siblings, or children? Grandchildren, perhaps? And what about the accounts of his trusted fiduciaries? The court will take up this question on Wednesday in Polselli v. United States.
The question comes to the court in the case involving Remo Polselli, who over several years accumulated aggregate federal tax liabilities exceeding $2 million. He made a partial payment of the assessed taxes from the bank account of one of his limited liability companies. That payment prompted an IRS agent to surmise that Polselli might be shielding his assets – for example, using his LLC, other entities, or trusted individuals. The agent then issued a series of administrative summonses to Wells Fargo, where Polselli’s wife, Hanna, held an account, and J.P. Morgan Chase Bank and Bank of America, where Polselli’s law firms held accounts.
Although the IRS notified neither Hanna Polselli nor the law firms of the summonses, the banks did. And that led Hanna Polselli and the law firms to go to court, seeking to quash the summonses. They argued that the IRS had failed to provide them with notice of the requests. The United States asked the court to throw the case out, arguing that the IRS was not required to notify them.
That dispute is at the center of the case now before the court. Under Section 7609(a) of the Internal Revenue Code of 1986 (as amended), the IRS is generally required to provide notice to a person when it serves an administrative summons on a third party (here, the bank) requiring the third party to produce records concerning that person. That notice must be accompanied by a copy of the summons and an explanation regarding the person’s right to bring a proceeding to quash the summons. There are important exceptions to the notice requirement though, including those applicable when the IRS is attempting to collect assessed taxes. In particular, under Section 7609(c)(2)(D), notice is not required with respect to any summons “issued in aid of the collection of (i) an assessment made … against the person with respect to whose liability the summons is issued; or (ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i).”
Thus, if the IRS issued an administrative summons (under these facts) to a financial institution regarding Remo Polselli’s bank account, the IRS would not be required to notify Remo. In the government’s opinion, the same is true even when the summons is issued with respect to someone else’s account, so long as the summons was issued to help collect Remo’s assessed taxes. The plain text of the statute requires no more, the government contended: An assessment was, in fact, made against Remo Polselli, and each administrative summons was “issued in aid of the collection” of Remo’s assessed taxes. Period. The fact that the summonses happened to have been served on Hanna Polselli’s bank (among others), the government reasoned, was wholly irrelevant in the wake of a valid assessment with intent to collect. In its motion to dismiss, the government emphasized that the United States has waived sovereign immunity in this context only with respect to those entitled to notice. Therefore, the government concluded, the district court lacked the power to hear the petitions to quash the summonses.
Hanna Polselli and the law firms countered that the district court had the power to hear the case because the notice was, in fact, required. They first pointed out that the United States’ reading of the statute was “hyperliteral” in the sense that such an interpretation would allow the IRS to issue an administrative summons without notifying anyone so long as it had anyvalid assessment and issued the summons in an effort to collect the taxes due. Accepting such a perverse reading of Section 7609(c)(2)(D)(i), they said, would allow the IRS to exercise authority far beyond what Congress intended in excusing notice in specific circumstances. Moreover, they added, such a reading would render Section 7609(c)(2)(D)(ii) (regarding transferees and fiduciaries of the assessed taxpayer) totally superfluous. After all, if an assessment and intent to collect are enough, then there is no need for special statutory language to address the case of transferees and fiduciaries. Given that statutory provisions should not be read to render other provisions redundant or superfluous, they argued, the provision excusing notice in the wake of a taxpayer assessment must be given a limited yet rational reading under which notice is not required when the assessed taxpayer actually has a recognizable legal interest in the records summoned.
Despite the objections from Hanna Polselli and the law firms, the district court granted the government’s motion to dismiss. Aligning itself with circuit-level authority handed down in Davidson v. United States and Barmes v. United States, the district court emphasized the need to embrace the plain language of the statute. If a given provision is clear and unambiguous, in its view, there is no justification for resorting to its legislative history. The court went on to emphasize its obligation to construe waivers of sovereign immunity strictly. By following the guidance of Davidson and Barmes, the district court consciously steered clear of the approach taken by the U.S. Court of Appeals for the 9th Circuit in Ip v. United States, in which the court rejected the “plain language” approach and concluded that Congress’s intent (as reflected in legislative history) should be taken into account. Such an approach would excuse notice when the assessed taxpayer has a recognizable legal interest in the records summoned.
On appeal, the U.S. Court of Appeals for the 6th Circuit affirmed the district court’s ruling. Although it conceded that its interpretation of the statute leads to some redundancy, the court nonetheless found no fault in Congress employing a “belts and suspenders” approach to clarify that notice is excused not only when an administrative summons is used to collect taxes assessed with respect to a taxpayer but also when such a summons is used to collect the liability of a transferee or fiduciary of such a taxpayer. The 6th Circuit’s lone dissenter seized upon the majority’s attempt to fabricate a role for the rule regarding transferees and fiduciaries (Section7609(c)(2)(D)(ii)) in the shadow of a rule that, according to the dissent, was drafted broadly enough to cover transferees and fiduciaries (Section 7609(c)(2)(D)(i)), effectively rendering Section 7609(c)(2)(D)(ii) clear surplusage. Avoiding such a result, reasoned the dissent, can be achieved by requiring that the assessed taxpayer (or their transferee or fiduciary) have a recognizable legal interest in the records summoned.
In addition to introducing technical interpretive questions, the case also presents very real taxpayer privacy issues. Hanna Polselli and the law firms argued that allowing the IRS to serve and enforce an administrative summons without notice in some contexts might trigger Fourth Amendment search and seizure concerns or facilitate inappropriate investigatory conduct. After highlighting laws prohibiting certain IRS disclosures and the limited scope of an administrative summons, the 6th Circuit dismissed that argument, noting that Congress has every right to prioritize IRS collection efforts over taxpayer privacy.
Acting within statutory confines definitely has its merits. And yet, the argument that conduct aligns perfectly with the wording of a provision in the Internal Revenue Code has never really foreclosed further inquiry or excused compliance with relevant judicial doctrines, especially when deemed necessary to police wayward taxpayer conduct. This case presents the question whether those notions apply with equal force when the United States, relying on the plain wording of a statute, exercises its plenary collection powers.