626 F. App'x 324
2d Cir.2015Background
- Highland Capital challenges an IRS third-party summons to Barclays related to Highland’s 2008 audit, arguing improper notice, privilege, and bad faith; the District Court denied quashing and granted enforcement, and the court ordered further consideration of privilege issues on remand.
- The IRS sought documents concerning losses from two Barclays transactions tied to Highland’s 2008 audit and a Barclays settlement agreement.
- Highland Capital asserts the summons seeks irrelevant documents (beyond those two transactions) and was issued in bad faith or for improper purposes.
- The district court applied Powell’s four-factor test for prima facie relevance and reasonableness of the notice, and also addressed privilege and potential bad-faith concerns.
- The panel vacates part of the district court’s order regarding privilege, remands to consider in-camera privilege review, and affirm(s) the rest of the order enforcing the summons.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the summons is relevant to the 2008 audit. | Highland argues records beyond the two transactions are irrelevant. | IRS contends information about other transactions could illuminate the settlement relation to the audits. | Relevant under Powell; IRS satisfies threshold of potential light on returns. |
| Whether the IRS provided reasonable advance notice under § 7602(c)(1). | Notice was insufficiently specific about third-party contacts and documents. | Oral and publication notices plus § 7609 compliance satisfied § 7602(c)(1). | Oral notice in January 2014 was sufficient; § 7602(c)(1) requires reasonable notice, not per-document notice. |
| Whether the documents sought are entitled to privilege protection. | Barclays materials may be attorney-client, work-product, or tax-practitioner privileged. | Privileged materials may exist; IRS argues against routine privilege review. | District Court erred by not addressing privilege; remand for in-camera review. |
| Whether the IRS acted in bad faith in issuing the summons. | IRS contacts with Barclays, contract breaches, and communication failures suggest bad faith. | Record does not establish bad faith; allegations are not tightly linked to the summons. | Too weak to find bad faith; no clear error in denial of quash based on bad faith. |
| Whether Highland is entitled to an evidentiary hearing on bad faith. | Specific facts plausibly suggest bad faith warranting a hearing. | District Court properly denied a hearing given the lack of plausible inferences. | Court reviews denial for abuse of discretion; no reversible error found; on remand, consider in-camera hearing if appropriate. |
Key Cases Cited
- United States v. Powell, 379 U.S. 48 (U.S. 1964) (establishes four-factor test for IRS summons relevance and reasonableness)
- Adamowicz v. United States, 531 F.3d 151 (2d Cir. 2008) (applies totality-of-circumstances approach to § 7609 notice and bad-faith considerations)
- Mollison v. United States, 481 F.3d 119 (2d Cir. 2007) (defers to agency relevancy determinations; heavy burden on taxpayer to disprove Powell factors)
- United States v. Clarke, 134 S. Ct. 2361 (2014) (allows privilege-based challenges; supports in-camera consideration)
- In re Dow Corning Corp., 261 F.3d 280 (2d Cir. 2001) (privilege protections against compelled disclosure; court review for abuse of discretion)
- In re Sims, 534 F.3d 117 (2d Cir. 2008) (abuse-of-discretion standard for privilege rulings)
- Chase Manhattan Bank, N.A. v. Turner & Newall, PLC, 964 F.2d 159 (2d Cir. 1992) (protects attorney-client privilege against compelled disclosure)