Director, Center for Supreme Court AdvocacyNational Association of Attorneys General
This Report summarizes cases granted review on November 21 and December 1 and 9, 2022 (Part I).
Case Granted Review: Polselli v. IRS, 21-1599
Polselli v. IRS, 21-1599. The Court will resolve the following issue: “[W]hen the IRS summons an innocent party’s records from a third-party recordkeeper (like a bank, accountant, or attorney), after issuing an assessment against a delinquent taxpayer, does §7609 of the Internal Revenue Code entitle the innocent party to notice and an opportunity to petition to quash the summons?” Under § 7609’s default rule, when the IRS issues a summons to a third-party record-keeper (like a bank, accountant, or law firm), it must give notice to any person named in the summons (typically the bank accountholder or the accountant’s or lawyer’s client). I.R.C. §7609(a)(1). Any person entitled to notice then has a limited time to petition a district court to quash the summons. Id. §7609(b)(2). But the right to notice does not extend to a 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”—i.e., the delinquent taxpayer—“or (ii) the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i),” id. §7609(c)(2)(D). When that exception applies, the right to petition to quash is never triggered.
In the Ninth Circuit, the §7609(c)(2)(D)(i) notice exception applies only when the delinquent taxpayer owns (or has a similar legal interest in) the summonsed records. Ip v. United States, 205 F.3d 1168, 1176 (9th Cir. 2000). Thus, the IRS need not give notice when it seeks records belonging to someone who owes the government money and might use the heads-up to hide assets held in accounts that he owns. But if the IRS summonses records belonging to innocent third parties (because, say, it thinks those records might contain information relevant to collecting an assessment against a delinquent taxpayer), it must give notice, and the innocent party may then petition to quash the summons. The Sixth and Seventh Circuits, in contrast, do not recognize any distinction between delinquent taxpayers and innocent third parties. In their view, once the IRS has issued an assessment against a delinquent taxpayer, §7609(c)(2)(D)(i) allows it to summons anyone’s private records, without notice, as long as it thinks the records might aid its collection efforts.
Here, the IRS issued a tax assessment against Remo Polselli, who is not a party here. Then, an IRS agent issued summonses to three banks “directing them 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 sought the law firms’ records because it wanted to know how Remo had paid them. It sought Mrs. Polselli’s bank records because it thought Remo might have access to, and keep his assets in, her accounts. The IRS did not notify petitioners (Mrs. Polselli and the two law firms) of the summonses, but the banks did. Petitioners then petitioned to quash the summonses under §7609(b)(2), arguing that (1) the summonses were overbroad and sought irrelevant information and (2) the IRS had failed to provide notice. The district court granted the IRS’s motion to dismiss for lack of subject-matter jurisdiction, and a divided panel of the Sixth Circuit affirmed. 23 F.4th 616.
The Sixth Circuit first reasoned that, like any waiver of sovereign immunity, the waiver of immunity in §7609 must be “construe[d] strictly . . . in favor of the United States.” It then found that §7609(c)(2)(D)(i) “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.” Accordingly, if the government “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,” and no waiver of sovereign immunity will apply to permit a suit to quash the summons by that person or entity. The majority found that the government had “satisfied its burden here.” The IRS, in its brief in opposition, supports that plain-meaning reading, asserting that “[i]n the terms of the statute, the summonses were  ‘issued in aid of the collection of . . . an assessment made . . . against’ Mr. Polselli, who is the ‘person with respect to whose liability the summons[es] [were] issued.’” The IRS observed that this still requires the IRS to provide notice often: “the government must typically provide notice of a summons issued for the purpose of assessing a liability. The government must also typically provide notice of a summons issued in aid of the collection of a liability that has not yet been assessed, unless it is in aid of the collection of the derivative liability of a transferee or fiduciary.” (Citations omitted.)
Petitioners argue that “§7609’s text, structure, and purpose all show that the §7609(c)(2)(D)(i) exception applies only when the delinquent taxpayer owns or has a legal interest in the records summoned.” They maintain that their “reading tracks the provision’s focus on ‘the person with respect to whose liability the summons is issued.’ Id. §7609(c)(2)(D)(i). There would be little reason to include that language if §7609(c)(2)(D)(i) reached records of other people’s accounts.” And they say their “reading also preserves a role for §7609(c)(2)(D)(ii). Subsection (D)(ii) applies to records in which transferees and fiduciaries who have wrongfully shielded the taxpayer’s assets have an interest. As Judge Kethledge put it [in dissent], if §7609(c)(2)(D)(i) reached records of anyone’s accounts just because the IRS had assessed a delinquent taxpayer’s liability, then ‘Congress was wasting its time in writing §7609(c)(2)(D)(ii).’” (Citations omitted.) Petitioners add that a “generous interpretation of §7609(c)(2)(D)(i) would obliterate §7609’s central purpose” of “safeguard[ing] the public’s privacy interests by extending the right to notice of a summons and the right to petition to quash it. . . . Reading §7609(c)(2)(D)(i) to apply whenever the IRS issues an assessment renders § 7609(a)’s notice requirement ‘entirely superfluous as to summonses issued in aid of collecting a previously assessed tax liability’ and vitiates §7609(b)’s petition-to-quash provision as well.’”
Editor’s note: Some of the language in the background sections of the summaries below was taken from the petitions for writ of certiorari and briefs in opposition.