Tax News and Developments May 2023
In brief
On 18 May 2023, the Supreme Court sided with the IRS in a dispute that centered on the agency’s power to issue summons for bank account records without notice to the interested account holders. The court’s decision, however, is far from an unmitigated victory for the agency. In fact, the majority and concurring opinions reflect the court has significant reservations about the IRS’s use of no-notice summons, particularly in cases involving innocent third parties.
In depth
As discussed in our previous article, Polselli v. IRS involved a challenge to the scope of the IRS’s authority to issue “no-notice” summonses under section 7609(c)(2)(D)(i). While section 7609 generally requires the IRS to provide notice to any person who is identified in a summons, section 7609(c)(2)(D)(i) set forth an exception for summonses issued “in aid of the collection of…an assessment made or judgment rendered against the person with respect to whose liability the summons is issued”. In Polselli, the Supreme Court rejected petitioners’ argument that this exception should be limited to cases in which the delinquent taxpayer himself holds a “legal interest” in the summonsed records.
The court unanimously joined Chief Justice Roberts’ majority opinion, which held that plain language of section 7609(c)(2)(D)(i) did not support petitioners’ proposed legal-interest test. The absence of an express reference to “legal interest” in the words of the statute was an especially compelling point, in the court’s view, given that an adjacent Code section—section 7610, dealing with reimbursement of costs for summons compliance—specifically sets forth an exception for the costs of producing records in which the delinquent taxpayer “has a proprietary interest”. The majority also concluded that the petitioners’ arguments for implying a legal-interest limitation in section 7609(c)(2)(D)(i) were unconvincing. Chief Justice Roberts wrote that the phrase “in aid of” ordinarily means “to help” or “assist”, and could not reasonably be interpreted to require—as petitioners urged—that the summons “directly advance” collection by seeking records of collectible funds. The court also rejected petitioners’ argument that a broad interpretation of clause (i) in section 7609(c)(2)(D) rendered clause (ii) “superfluous,” agreeing with the IRS that these provisions apply in different contexts and for two different types of liabilities.
While the court ultimately rejected petitioners’ legal-interest test, it was careful to frame its decision in the narrowest possible terms. Specifically, Chief Justice Roberts wrote that the court’s opinion did not render any opinion “on the precise bounds of the phrase ‘in aid of the collection’ ”, suggesting, in effect, that the court remains open to challenges in future cases where a summons fails to seriously advance collection of a delinquent taxpayer’s liability. Paying credence to concerns raised by petitioners (and numerous amici) about unwarranted invasions of privacy, the Chief Justice wrote further: “We do not dismiss any apprehension about the scope of the IRS’s authority to issue summonses. As we have said, ‘the authority vested in tax collectors may be abused, as all power is subject to abuse.’” Slip op. at 12 (quoting United States v. Bisceglia, 420 U.S. 141, 146 (1976)).
A concurring opinion authored by Justice Jackson (joined by Justice Gorsuch) gave fuller voice to the “apprehension” alluded to by the majority. While she agreed with the majority’s specific holding that section 7609(c)(2)(D)(i) does not impose a legal-interest limitation, Justice Jackson wrote that her understanding of section 7609’s purpose would have led her to reach a different result if the case were not decided on such a narrow basis. The concurrence emphasized that the “default rule” under section 7609 is to provide notice, and so the exception set forth in section 7609(c)(2)(D)(i) requires a balancing of interests, between the government’s interest in collection, on the one hand, and the individual’s interest in notice and an opportunity for judicial review, on the other. Moreover, Justice Jackson explained that “the statute’s balancing of interests indicates that Congress did not give the IRS a blank check…to do with as it will in the collection arena.” With that in mind, she concluded that the IRS’s decision to utilize section 7609(c)(2)(D)(i) in the petitioners’ case was a step too far: “Allowing the agency to sidestep oversight of its broad summons power by not providing notice in these kinds of situations undermines the important aims of the default-notice system.”
In short, while Polselli represents a significant victory for the IRS, the decision, taken as a whole, signals that the court does not believe the agency’s power to issue no-notice summons “in aid of collection” is unbounded. Justice Jackson’s concurrence, in particular, makes plain that she would interpret the statute to require something like a balancing test in all cases moving forward. Only time will tell whether the agency heeds this guidance and implements a more conservative approach in future cases seeking to compel the production of records from innocent third parties.
