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U.S. Supreme Court,
Ethics/Professional Responsibility

Jan. 27, 2023

Supreme Court to decide IRS summons-notice rule for innocent third parties; but why this case?

When the government knows a law firm caters to a particular type of client – worst case, criminals not known to the government – obtaining the client list is tantamount to fishing with dynamite.

Evan J. Davis

Principal, Hochman, Salkin, Rettig, Toscher & Perez

Phone: (310) 281-3288


Evan pspent 11 years as an assistant U.S. attorney in the Central District of California, including three years in the Tax Division where he handed civil and criminal tax cases and 11 years in the Major Frauds Section of the Criminal Division where he handled white-collar, tax and other fraud cases through jury trial and appeal. He represents individuals and closely held entities in criminal tax (including foreign-account and cryptocurrency) investigations and prosecutions, civil tax controversy and litigation, sensitive issue or complex civil tax examinations and administrative tax appeals, and federal and state white-collar criminal investigations including campaign finance, FARA, money laundering, and health care fraud.

The Supreme Court recently granted certiorari in Polselli v. IRS, No. 21-1599, an IRS summons-notification case that ostensibly hinges on whether the "plain language" statutory construction canon beats the "avoiding superfluity" and "legislative intent" canons. However, the decision will hinge not on canons but instead on whether the Justices prefer tax-collection expediency over the privacy interests of innocent third parties who want notice and the opportunity to quash a summons for their records held by others (e.g., banks) where the IRS thinks those records could help collect a delinquent taxpayer's debt.

First, how we got here. In 1964 and 1971 decisions, the Supreme Court ruled existing tax laws allowed the IRS to summon most documents without giving anyone notice or an opportunity to challenge the summons, which elevated tax expediency over privacy and government-overreach concerns. Shortly after the second decision, the Watergate scandal unfolded, and the public eventually learned President Nixon had used taxpayer information and the IRS against his political enemies. The Nixon revelations motivated Congress in 1976 to enact strong taxpayer privacy laws with new Tax Code Section 6103, and at the same time in new Section 7609 to require the IRS to give appropriate notice upon issuing a summons unless a statutory exception applied.

Despite broadly protecting privacy over tax expediency, Congress knew unscrupulous delinquent taxpayers could try to stay one step ahead of the IRS by moving assets every time they received notice of a collection summons. Because of that, Section 7609(c)(2)(D)(i) broadly exempted collection summonses from the notice provisions, and then 7206(c)(2)(D)(ii) specifically exempted collection summonses for records of the delinquent taxpayer's nominees and transferees (aka, those in cahoots with the delinquent taxpayer).

This broad Section 7609(c)(2)(D)(i) exemption language followed by specific Section 7206(c)(2)(D)(ii) exemption language has led to a circuit split in situations where an innocent third party who is not a nominee or transferee wanted notice and opportunity to quash an IRS summons seeking their records held by someone else. The Ninth Circuit in Ip v. United States, 205 F.3d 1168 (9th Cir. 2000) decided the broad exemption had to be interpreted narrowly - in a way that requires notice to innocent third parties - because a broad interpretation rendered the specific exemption superfluous and would thwart Congress's intent to protect privacy. Therefore, the innocent third party would receive notice; a required "ticket" to an opportunity to quash the summons in the Ninth Circuit. The Seventh Circuit, recently joined by the Sixth Circuit in Polselli and previously by the Tenth Circuit in an unpublished decision, decided in Barmes v. United States, 199 F.3d 386 (7th Cir. 1999) the plain language of the broad exemption should be honored despite that doing so rendered the specific exemption superfluous and despite that it sacrificed innocent third parties' privacy.

Historically, the Supreme Court only chooses a handful of tax cases every year, so why might Polselli have made the cut?

It wasn't because the taxpayer was particularly sympathetic, at least as painted in the lower courts. Mr. Polselli, who isn't a party to the case, owed $2 million in taxes and allegedly played a cat-and-mouse game with IRS collection officers. The IRS sent summonses to Mr. Polselli's wife's banks for her records to determine whether Mr. Polselli was using her bank accounts to hide his funds from the IRS; this nominee-like situation alone may not have made the cut for certiorari. However, the IRS also summoned a law firm's client trust account records.

The IRS allegedly knew Mr. Polselli had a history of using third-party entities to control his assets and make payments on his behalf. So, it went directly to Mr. Polselli's longtime law firm and summoned its records to determine how Mr. Polselli had paid his legal bills; the law firm said it had no responsive records and refused to provide a witness to answer questions under oath. Instead of suing to force the law firm to comply with the summons, the IRS summoned the law firm's bank for trust account payment records for all the firm's clients including Mr. Polselli. The banks notified the law firm and Ms. Polselli, who petitioned to quash the summonses. The district court determined the firm and Ms. Polselli weren't entitled to notice under the statute's plain language, and if they weren't entitled to notice, then they couldn't petition to quash the summons and it dismissed the case. The Sixth Circuit agreed, siding with the Seventh Circuit over the Ninth Circuit.

Given the 1-1 circuit split before Polselli, with an unpublished Tenth Circuit decision also supporting the Seventh Circuit's position, if the Justices broadly agreed with the "plain language" approach then the Court would have denied certiorari. Presumably, at least four justices think the Ninth Circuit's approach is the right one and wanted to stop the proliferation of privacy-trampling decisions.

This grant of certiorari is hard to square, however, with a more concerning case rejected for certiorari a year earlier, Taylor Lohmeyer Law Firm PLLC v. United States, No. 20-1596, in which a district court approved a "John Doe" summons to a law firm to identify its clients - where the firm specialized in tax advice and had allegedly helped one client under audit with offshore transactions and rendered legal advice - presumably to identify and audit the firm's other clients who might have done the same thing. Boutique practitioners particularly were stunned by the decision, as when the government knows a law firm caters to a particular type of client - worst case, criminals not known to the government - obtaining the client list is tantamount to fishing with dynamite. This case more directly implicated attorney-client privilege and privacy than Polselli but didn't make the certiorari cut.

How can one make sense of the Court accepting Polselli and not Taylor Lohmeyer? It appears the Court recognizes that forcing the government to justify its actions in court is a critical check on its abuse of power, but they didn't want to limit the IRS's summons power. I would dissent, but I don't get a vote.


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