Overview
On June 28, 2022, the petitioners, the taxpayer's wife, and his lawyers, in Polselli v. United States Department of the Treasury filed a petition for writ of certiorari to the US Supreme Court requesting the Court review a decision of the US Court of Appeals for the Sixth Circuit, which affirmed a decision of the district court for the Eastern District of Michigan dismissing petitioners' suit to quash a group of IRS summonses served on the petitioners' banks.1 The IRS issued the summonses without giving notice to the petitioners. Polselli presents an acknowledged split between the circuit courts: when the IRS summons an innocent party's records from a third-party recordkeeper, after issuing an assessment against a delinquent taxpayer, does section 7609 entitle the party, whose records are the subject of the summons, to notice and an opportunity to petition to quash the summons? The Sixth Circuit, joining the Seventh Circuit2, said "no." However, the Ninth Circuit held that notice was required.3
The Statute – Section 7609
The Internal Revenue Code (Code) authorizes the IRS to issue summonses to third-party recordkeepers for documents to help it collect taxes from delinquent taxpayers.4 The Code also provides procedural protections for persons whose records the IRS targets. The IRS must give notice "to any person" who "is identified in the summons" (usually the subject of the records) at least 23 days before the recordkeeper must produce documents.5 In addition, "any person who is entitled to notice of a summons" has 20 days to file a petition to quash the summons in district court.6 The notice provided by the IRS must "contain an explanation of the right" to petition to quash.7
The statute makes a handful of exceptions to the notice requirement. Namely, section 7609(c)(2)(D) exempts any summons "issued in aid of the collection of (i) an assessment made or judgment rendered 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)." When this exception applies, the IRS need not give the record owner notice of the summons. The question presented in Polselli concerns the scope of Section 7609(c)(2)(D)(i).
The legislative history behind Section 7609 is well documented. Congress enacted Section 7609's notice and petition to quash provisions to overturn Supreme Court decisions that unduly restricted the public's right to challenge IRS summonses.8 In 1976, Congress gave citizens the right to intervene in a proceeding to enforce the summons, and in 1982, Congress added the right to petition to quash. However, Congress recognized that giving notice of a summons could prompt a delinquent taxpayer to move his or her funds. So Congress created an exception to the notice provision so that the IRS does not have to give a taxpayer notice when issuing a summons "to determine whether the taxpayer has an account in a bank and whether the assets in that account are sufficient to cover the tax liability which has been assessed."9 Congress similarly chose not to require notice "where the IRS is attempting to enforce fiduciary or transferee liability for a tax which has been assessed,” to avoid enabling the taxpayer, transferee, or fiduciary to move money during "the 14-day grace period."10
Factual background
The IRS issued a $2 million tax assessment against Remo Polselli. Thereafter, an IRS agent issued summonses to three banks of the taxpayer’s wife and Reno Polselli’s lawyers, which directed the banks to "'appear before' the agent 'to give testimony' and 'to produce for examination,' among other things, 'all bank statements relative to the accounts' of Hanna Polselli and the two law firms." The IRS claimed that the summoned records might help it collect Remo Polselli’s tax liabilities. The IRS sought the law firms’ records because the IRS wanted to know how Mr. Polselli had paid his attorney fees.
The IRS did not notify Mrs. Polselli or the law firms of the summonses. However, the banks did provide notice to both petitioners. The petitioners moved in district court to quash the summonses under section 7609(b)(2), asserting that (1) the summonses were overbroad and sought irrelevant information and (2) the IRS had failed to provide notice under section 7609. The district court granted the IRS’s motion to dismiss for lack of subject-matter jurisdiction, reasoning that because the IRS had claimed that petitioners' bank records would aid its collection efforts against Remo Polselli, section 7609(c)(2)(D)(i) exception to the notice requirement applied – thus, petitioners were not entitled to notice.11 The district court reasoned that since petitioners had no right to notice, petitioners had no right to petition to quash the summonses.
Sixth Circuit Decision
On appeal, the Sixth Circuit affirmed with a dissent by Judge Kethledge. The court then denied rehearing but granted Petitioners' motion to stay the mandate pending a cert petition to the Supreme Court. The court held that section 7609(c)(2)(D)(i) stripped petitioners of the right under section 7609(a) and (b) to notice of and an opportunity to challenge the IRS's summonses because the IRS issued those summonses "in aid of" its efforts to collect Remo Polselli’s assessed tax liability. In reaching its conclusion, the court agreed with the Seventh Circuit and an unpublished decision from the Tenth Circuit.12 The court expressly disagreed with the Ninth Circuit’s decision in Ip.
In Ip, the Ninth Circuit held that section 7609(c)(2)(D)(i)’s exception to section 7609's broad notice rule applies "only where the assessed taxpayer has a recognizable legal interest in the records summoned."13 The Sixth Circuit rejected Ip's reasoning and found the text of section 7609 was clear. The majority disagreed that its "interpretation rendered section 7609(c)(2)(D)(ii) meaningless" because, in its view, the "IRS's efforts to collect a taxpayer's liability" are "legally and procedurally distinct from its collection efforts of the transferee or fiduciary's liability—which liability must be rooted in state law." The majority reasoned that its holding did not undermine section 7609’s pre-notice purpose because the IRS must still "provide notice when issuing summonses related to any of its non-collection functions."
Judge Kethledge dissented, explaining that he would have followed the Ninth Circuit's decision in Ip. Judge Kethledge believed that the majority's decision rendered superfluous other provisions in the same enactment, concluding that the majority's reading of section 7609(c)(2)(D)(i), "mauls the bulk of § 7609" by making not only § 7609(c)(2)(D)(ii) but also § 7609(a) and (b) superfluous. Judge Kethledge thus agreed with the Ninth Circuit in Ip that the best approach was to read section 7609 "as a whole" by interpreting "in aid of a collection of" more narrowly than it would ordinarily be read.
In March 2022, the Sixth Circuit denied petitioners’ petition for rehearing en banc.14
Petition for Writ of Certiorari
In June, petitioners filed a petition for a writ of certiorari to the US Supreme Court. The petition was supported by an amicus brief filed by The Center for Taxpayers Rights. The petitioners emphasized the split between the circuits stating: "The Sixth Circuit's decision deepens an acknowledged 1–2 circuit split over when the IRS may seize a person’s private records without notice or an opportunity to assert defenses." The Solicitor General's response to the petition is due by August 29, 2022.
Endnotes
1 23 F.4th 616 (6thCir. 2022)
2 Barmes v. United States, 199 F.3d 386 (7th Cir. 1999)
3 Ip. v. United States, 205 F.3d 1168 (9th Cir. 2000)
4 See Sections 7602(a) and 7603(b)
5Section 7609(a)(1)
6Section § 7609(b)(2)
7Section § 7609(a)(1)
8 See Tiffany Fine Arts, 469 U.S. at 315-16; Donaldson v. United States, 400 U.S. 517, 530- 31 (1971),
9 H.R. Rep. No. 94-658, at 310 (1975); see also S. Rep. No. 94-938, pt. 1, at 371-72 (1976).
10 H.R. Rep. No. 94-658, at 310; S. Rep. No. 94-938, pt. 1, at 371-72.
11 2020 WL 12688176.
12 Citing Barmes, 199 F.3d at 390, and Davidson v. United States, 149 F.3d 1190, 1998 WL 339541, at *2 (10th Cir. June 9, 1998)).
13 Ip, 205 F.3d at 1176
14 2022 WL 1072869 (March 28, 2022)