HANNA KARCHO POLSELLI; ABRAHAM & ROSE, P.L.C.; JERRY R. ABRAHAM, P.C., Petitioners-Appellants, v. UNITED STATES DEPARTMENT OF THE TREASURY-INTERNAL REVENUE SERVICE, Respondent-Appellee.
No. 21-1010
UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT
January 7, 2022
RECOMMENDED FOR PUBLICATION Pursuant to Sixth Circuit I.O.P. 32.1(b) File Name: 22a0003p.06
Appeal from the United States District Court for the Eastern District of Michigan at Flint. No. 4:19-cv-10956—Stephanie Dawkins Davis, District Judge.
Decided and Filed: January 7, 2022
Before: MOORE, KETHLEDGE, and DONALD, Circuit Judges.
COUNSEL
ON BRIEF: Daniel W. Weininger, ABRAHAM & ROSE, P.L.C., Troy, Michigan, for Appellants. Michael J. Haungs, Geoffrey J. Klimas, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.
MOORE, J., delivered the opinion of the court in which DONALD, J., joined. KETHLEDGE, J. (pp. 18–21), delivered a separate dissenting opinion.
KAREN NELSON MOORE, Circuit Judge. In pursuit of over $2 million of a taxpayer‘s unpaid liabilities, the IRS issued administrative summonses to the banks of the taxpayer‘s wife and lawyers, Petitioners in this case. The IRS did not notify Petitioners of the summonses, relying on relevant provisions of the Internal Revenue Code excluding summonses issued “in aid of the collection” of tax assessments from its notice provisions. We conclude that the summonses were issued in aid of the IRS‘s collection efforts and that Petitioners were not entitled to notice. Because the United States waives sovereign immunity only when a taxpayer entitled to notice challenges a summons, the district court lacked subject-matter jurisdiction over Petitioners’ proceedings to quash the summonses. Accordingly, we AFFIRM the judgment of the district court.
I. BACKGROUND
Remo Polselli underpaid his federal taxes for over a decade. R. 6-2 (Bryant
While investigating the location of assets to satisfy those liabilities, IRS Revenue Officer Michael Bryant learned that Remo2 used entities to shield assets from collection. Id. ¶ 7 (Page ID #60–61). For example, in 2018, Remo paid approximately $290,000 toward his outstanding tax liabilities from the account of “Dolce Hotel Management LLC,” rather than from his own bank account. Id.
Bryant suspected that Remo was concealing the balance of his assets elsewhere to shield them from the IRS. Bryant‘s investigation has revealed that Remo “may have access to and use of” bank accounts held in the name of his wife, Hanna Karcho Polselli. Id. ¶ 5 (Page ID #60). Based on this information, Bryant served a summons on Wells Fargo Bank, N.A. seeking account and financial records of Hanna and Dolce Hotel Management LLC3 “concerning” Remo. Id. ¶ 5, 7 (Page ID #60); R. 6-3 (Wells Fargo Summons at 1) (Page ID #65).
Bryant also learned that Remo was a long-time client of the law firm Abraham & Rose, P.L.C. R. 6-2 (Bryant Decl. ¶¶ 8, 9) (Page ID #61). Surmising that the law firm‘s financial records might reveal (1) the source of Remo‘s funds, (2) bank accounts associated with Remo, (3) entities Remo owned or controlled, or (4) bank accounts associated with those entities, Bryant served the law firm with a summons. Id. ¶ 8, 16 (Page ID #61, 62). In response, Abraham & Rose sent a letter in which it asserted attorney-client privilege and represented that the firm did not retain any of the documents that the IRS requested. R. 6-6 (Letter from Abraham & Rose to IRS at 1) (Page ID #77). When Bryant contacted the firm‘s representative possessing the power of attorney, Sheldon Mandelbaum, Mandelbaum repeated that the firm did not possess any documents responsive to the IRS‘s request. R. 6-2 (Bryant Decl. ¶ 12) (Page ID #61).
Bryant then pursued another avenue to locate the financial records. He issued identical summonses against JP Morgan Chase Bank, N.A. and Bank of America, N.A., seeking any financial records of Abraham & Rose and a related entity, Jerry R. Abraham, P.C. (the Law Firms), “concerning” Remo.4 Id. ¶ 8; (Page ID #61); R. 6-4 (JP Morgan Chase Summons at 1) (Page ID #69); R. 6-5 (Bank of America Summons at 1) (Page ID #73).
Bryant did not notify Hanna or the Law Firms of the bank summonses. R. 3 (Suppl. Pet. to Quash ¶ 11) (Page ID #23). Wells Fargo alerted Hanna that the IRS had summoned her records, and she petitioned to quash the summons in district court. R. 8 (Opp‘n to Mot. to Dismiss at 2) (Page ID #90); R. 1 (Pet. to Quash) (Page ID #1–18). After JP Morgan Chase and Bank of America notified the Law Firms of the summonses regarding their accounts, the Law Firms also petitioned to quash, and Hanna joined. R. 3 (Suppl. Pet.
The United States then moved to dismiss the petitions for lack of subject-matter jurisdiction. R. 6 (Mot. to Dismiss at 1) (Page ID #39). The Government explained that the relevant provisions of the Internal Revenue Code,
Petitioners opposed the motion, arguing that the Government‘s construction of
The district court agreed with the Government that the court lacked subject-matter jurisdiction. R. 11 (Dist. Ct. Order at 12) (Page ID #202). It found that “under the plain language of
II. ANALYSIS
A. Standard of Review
In challenging a district court‘s subject-matter jurisdiction over a proceeding, a party may present a “facial attack or a factual attack.” Gaetano v. United States, 994 F.3d 501, 505 (6th Cir. 2021) (quoting Carrier Corp. v. Outokumpu Oyj, 673 F.3d 430, 440 (6th Cir. 2012)). In a facial attack, a “movant accepts the alleged jurisdictional facts as true and ‘questions merely the sufficiency of the pleading’ to invoke federal jurisdiction.” Id. (quoting Gentek Bldg. Prods., Inc. v. Sherwin-Williams Co., 491 F.3d 320, 330 (6th Cir. 2007)). In a factual attack, a movant presents evidence outside of the pleadings to contest jurisdictional facts alleged in the petitions. Id.
Before the district court, the Government mounted a facial challenge to the petitions under its interpretation of Internal Revenue Code
B. Sovereign Immunity
The Government argues that sovereign immunity barred the district court from asserting jurisdiction over Petitioners’ suits to quash the summonses. As a government agency, the IRS is immune from suit absent an explicit statutory waiver. Clay v. United States, 199 F.3d 876, 879 (6th Cir. 1999). We must construe strictly a waiver of sovereign immunity in favor of the United States. Gaetano, 994 F.3d at 506. “Any ambiguities in the statutory language are to be construed in favor of immunity, . . . so that the Government‘s consent to be sued is never enlarged beyond what a fair reading of the text requires.” F.A.A. v. Cooper, 566 U.S. 284, 290 (2012). We are particularly careful to construe
Section 7609‘s notice provisions not only guide the IRS procedurally but also define the scope of the United States’ sovereign immunity. Under
C. Scope of § 7609(c)(2)(D)(i)‘s Notice Requirement Exception
“[T]he Government depends upon the good faith and integrity of each potential
[f]or the purpose of ascertaining the correctness of any return, making a return where none has been made, determining the liability of any person for any internal revenue tax or the liability at law or in equity of any transferee or fiduciary of any person in respect of any internal revenue tax, or collecting any such liability.
The IRS may also seek information from third parties to advance its enforcement efforts. Section 7609 of the Code outlines special procedures for summonses when those third parties are recordkeepers, often banks or financial institutions maintaining records of financial transactions of interest to the IRS. In general, the IRS must give notice to “any person . . . who is identified” in such a summons within three days of issuing the summons to the third-party recordkeeper.
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).
We agree with the district court that the summonses at issue fall squarely within the exception listed in
summons was issued “in aid of the collection” of that delinquency. We hold that as long as the IRS 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.
The Government has satisfied its burden here. The parties do not dispute that the IRS issued assessments against Remo totaling over $2 million. R. 6-2 (Bryant Decl. ¶ 2) (Page ID #59). Officer Bryant avers, and the parties similarly do not dispute, that he issued the summonses to the banks solely to “locate assets” to satisfy Remo‘s “existing assessed federal tax liability, and not to determine additional federal tax liabilities.” Id. ¶ 3 (Page ID
Our holding aligns with the decisions of two of our sibling circuits. In Davidson v. United States, 149 F.3d 1190 (Table), 1998 WL 339541 (10th Cir. June 9, 1998), the IRS assessed tax liability against the petitioner‘s husband. The IRS issued a summons regarding the petitioner‘s bank records without notice, and the petitioner moved to quash. Like Hanna, the petitioner argued that
The Seventh Circuit followed Davidson in Barmes v. United States, 199 F.3d 386 (7th Cir. 1999). The IRS in that case assessed taxes against a general partnership and issued a summons of the bank accounts of a trust over which the general partners had signature authority. Id. at 387. The general partners moved to quash the summons, and the Seventh Circuit upheld the district court‘s dismissal of the petition to quash. Id. at 390. The Seventh Circuit “agree[d] with the Tenth Circuit that as long as the third-party summons is issued to aid in the collection of any assessed tax liability the notice exception applies.” Id. And under
Although we have not previously demarcated the scope of
Petitioners argue that the analysis cannot be that simple, relying on Ip v. United States, 205 F.3d 1168 (9th Cir. 2000). In that case, the IRS summoned petitioner‘s bank account without notice after it had levied an assessment against a corporation for which petitioner‘s fiancé was the agent. Id. at 1169. The Ninth Circuit examined
We decline to adopt the Ip rule. “Only when following the literal language of the statute would lead to ‘an interpretation which is inconsistent with the legislative intent or to an absurd result’ can a court modify the meaning of the statutory language.” Donovan v. FirstCredit, Inc., 983 F.3d 246, 254 (6th Cir. 2020) (quoting Tenn. Prot. & Advoc., Inc. v. Wells, 371 F.3d 342, 350 (6th Cir. 2004)). Although Petitioners criticize the IRS‘s interpretation of the statute as “hyperliteral,” Appellants’ Br. at 10, we may not depart from the literal text of the statute when it comports with legislative intent. United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242 (1989) (“The plain meaning of legislation should be conclusive, except in the ‘rare cases [in which] the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters.‘” (quoting Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 571 (1982))). As explained below, our interpretation of
In urging us to conclude otherwise, Petitioners first reiterate the Ninth Circuit‘s concern that the IRS‘s interpretation of the exception outlined in
We disagree that our interpretation renders clause (ii) meaningless. Transferee and fiduciary liability are indeed derivative of the taxpayer‘s assessment, so Petitioners are correct in asserting that the former cannot exist without the latter. Laurence F. Casey, Federal Tax Practice § 12:04 (Edward J. Smith, ed., 4th ed. 2021) (“[W]here there is no deficiency, there can be no transferee liability.“). But the substantive law underlying the liability for taxpayers and their transferees or fiduciaries is distinct. The IRS determines the extent of a taxpayer‘s liability, which forms the basis for the assessment. See
Summonses issued in aid of collecting a transferee‘s or fiduciary‘s liability, moreover, may seek information only obliquely related to the underlying taxpayer. Suppose Remo fraudulently conveyed some of his assets to party A, who is married to party B. Party B, in this example, bears no relation to Remo. Suppose also that the IRS prevails in a suit against Party A for fraudulent transfer or in a summary proceeding under Internal Revenue Code
The dissent notes that summonses issued in aid of the collection of a fiduciary or transferee‘s liability derive ultimately from the original assessment on a taxpayer, and so a summons issued under clause (ii) would be covered under our interpretation of clause (i). We agree that our interpretation of the statute leads to some redundancy, but that does not give us license to add limiting language to the statute. “We find it much more likely that Congress employed a belt and suspenders approach” to clarify the scope of the conduct covered by the statute than that Congress intended us to adopt a meaning rooted nowhere in the statute‘s text. See Atl. Richfield Co. v. Christian, 140 S. Ct. 1335, 1350 n.5 (2020) (“Sometimes the better overall reading of the statute contains some redundancy.” (quoting Rimini Street, Inc. v. Oracle USA, Inc., 139 S. Ct. 873, 881 (2019))); see also Facebook, Inc. v. Duguid, 141 S. Ct. 1163, 1172 n.7 (2021) (noting that Congress‘s decision to include for clarity two subsections in statutory definition covering the same conduct is not superfluity). Congress intended to clarify that the IRS does not need to give notice when it issues summonses in aid of the collection of a liability of a transferee or fiduciary. We do not find that clarification meaningless.
Petitioners also endorse the Ninth Circuit‘s conclusion that the IRS‘s interpretation hinders the statute‘s overall aim of providing taxpayers with notice of third-party summonses. Appellants’ Br. at 12–13. The provisions exempting summonses issued in aid of collection of assessments, in Petitioners’ view, would consume the general rule encouraging notice of third-party recordkeeper summonses. Id. at 13.
Section 7609(c)(1) applies the notice requirement “to any summons issued under paragraph (2) of section 7602(a) or under section 6420(e)(2), 6421(g)(2), 6427(j)(2), or 7612.” This means that the IRS must provide notice when issuing summonses related to any of its non-collection functions, which include determining the correctness of any return, determining a person‘s tax liability, and examining books and records. Under
The Ninth Circuit also leaned on legislative history in interpreting
generally stated that “this procedure will not apply in the case of a summons used solely for purposes of collection.” Id. at 310. The Committee provided only one example of an instance in which the notice exception does not apply: when the IRS is “attempting to obtain information concerning the taxpayer‘s account for purposes other than collection.” Id. Nothing in the Committee Report constrains the exception to instances in which the parties possess some legal interest in the object of the summons. The legislative history of
Petitioners emphasize the “far-reaching privacy implications” of a broad interpretation of
Hanna argues that her financial information does not qualify as “return information” under
Section 7602(a)(2) also limits the scope of the summonses issued to third-party recordkeepers. Under that section, the IRS may summon an individual to provide information “as may be relevant or material” to an IRS inquiry.
Petitioners protest that those protections are insufficient. Although we are sympathetic to worries that the IRS may be able to access information regarding blameless third parties without notice, “this possibility was not thought by Congress to create a sufficient infringement to warrant the inclusion of additional statutory notice requirements for unidentified persons.” United States v. First Bank, 737 F.2d 269, 274 (2d Cir. 1984). Given that the IRS may share any information with the Department of Justice for criminal prosecution under Internal Revenue Code
If Petitioners worry about their inability to challenge an improperly issued third-party summons in court, they may pursue other avenues. Because we have held that “the IRS may validly issue summonses for the purpose of investigating criminal offenses,” Scotty‘s Contr., 326 F.3d at 788, Petitioners hypothesize that the IRS could issue a summons solely to investigate a criminal offense without giving the object of the investigation notice and an opportunity to challenge the summons. Appellants’ Reply Br. at 11–12. But the exception to the notice provisions, and the related jurisdictional bar, are tied to the IRS‘s collection efforts. Individuals suspecting that the IRS harbors ulterior motives are free to challenge the summons in court and may even seek jurisdictional discovery on the issue. See Haber v. United States, 823 F.3d 746, 751, 753 (2d Cir. 2016) (engaging in a “preliminary review of the IRS‘s contention that it issued the challenged summons in aid of collection“). Petitioners argue that Haber illustrates the futility of such challenges because the court ruled in favor of the IRS in that case. In Haber, however, the petitioner offered “no affirmative reason to believe that there was any ulterior purpose to the summons.” Id. at 752. If the taxpayer had made “a showing of facts that give rise to a plausible inference of improper motive,” his challenge would have been successful. Id. at 754 (quoting United States v. Clarke, 573 U.S. 248, 254 (2014)). A challenge to the government‘s motives does not seem as insurmountable a hurdle as Petitioners contend. See Clarke, 573 U.S. 254 (holding that a petitioner need not proffer a “fleshed out case” to present a plausible inference of bad faith of IRS agent).
In sum, Petitioners’ conjectural fears do not defeat Congress‘s prerogative to prioritize the IRS‘s collection efforts over taxpayer privacy. Any other result would significantly impede the IRS‘s “expansive information-gathering authority.” Arthur Young, 465 U.S. at 816. Congress explained that the impetus for excluding the notice requirement from collection efforts is to prevent individuals from hiding their assets. See H.R. Rep. No 94-658 at 310 (explaining exemptions to notice provisions prevent the possibility that the taxpayer could use the extra
D. Petitioners’ Remaining Arguments
Because we decline to adopt the Ip test, we need not apply it to the facts of this case. Even though the district court reached the same result, Petitioners argue that it abused its discretion by failing to consider Hanna‘s supplemental declaration. Appellants’ Br. at 28–29. Hanna submitted that declaration to refute the IRS‘s argument that Hanna‘s relationship with Remo would have survived the Ip test should we choose to adopt it. Id. at 28 (“Hanna filed a supplemental declaration for the limited purpose of countering [Officer Bryant‘s] supplemental declaration.“). Without the Ip test, however, the legal relationship between Remo and Hanna is irrelevant. The district court did not need to consider these declarations and therefore did not abuse its discretion in declining to do so.
We also decline Petitioners’ invitation to address the merits in this case. Petitioners were not entitled to notice of the IRS‘s summonses of their bank accounts, so the district court lacked subject-matter jurisdiction over their proceedings to quash them. See Gaetano, 994 F.3d at 511. The district court could not address the propriety of the summons without subject-matter jurisdiction over the petitions to quash, and neither can we. See Palkow v. CSX Transp., Inc., 431 F.3d 543, 556 (6th Cir. 2005) (“Being without jurisdiction, the District Court could not, and we cannot, address the merits of Plaintiff‘s complaint.“).
III. CONCLUSION
Because the summonses the IRS issued regarding Petitioners’ bank accounts were “in aid of the collection” of the assessments against Remo Polselli, we conclude that Petitioners were not entitled to notice under Internal Revenue Code
DISSENT
KETHLEDGE, Circuit Judge, dissenting. The Supreme Court has expressed “a deep reluctance to interpret a statutory provision so as to render superfluous other provisions in the same enactment.” Penn. Dept. of Pub. Welfare v. Davenport, 495 U.S. 552, 562 (1990). In my view, respectfully, that is how the government and now the majority have interpreted
Judicial review of the lawfulness of three summonses is all that Hanna Polselli and the petitioner law firms seek here. A single IRS agent issued summonses to three banks—Wells Fargo, JP Morgan Chase, and Bank of America—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 and the two law firms. That is a significant intrusion upon the privacy of those account holders. Cf.
Whether the petitioners had a right to judicial review of those summonses, under the law as it comes to us, depends on the meaning of
(D) issued in the 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)[.]
The question, more specifically, is whether the summonses to the banks fell within the scope of
The problem with that interpretation, plainly enough, is that it renders
The attempts of the government and the majority to revive
The mistake of the government and the majority is to read
Reading
I respectfully dissent.