In Polselli v. IRS, decided on May 18, 2023, the Supreme Court held that when the Internal Revenue Service (IRS) issues a third-party summons to aid the collection of a taxpayer's delinquent taxes, the IRS is not required to provide notice to the person whose records are the subject of the summons.
The Internal Revenue Code (IRC) authorizes the IRS to issue administrative summonses for the examination of records. Section 7609 of the IRC describes the procedures that apply to a third-party summons, which is directed to someone other than the taxpayer under examination who is believed to be in possession of materials relevant to that taxpayer. The IRS generally must provide notice to any person identified in a third-party summons. Section 7609 authorizes anyone entitled to such notice to bring a petition to quash the summons in federal district court, thus waiving the United States' sovereign immunity from lawsuits for this purpose. Section 7609(c)(2)(D)(i) creates an exception to this notice requirement when the summons is issued "in aid of the collection of . . . an assessment made . . . against the person with respect to whose liability the summons is issued."
Chief Justice Roberts's unanimous opinion for the Court in Polselli rejected the argument that this exception applies only when the delinquent taxpayer has a legal interest in the accounts or records summoned by the IRS. Rather, the Court held that the IRS is exempt from providing notice if the summons is issued to aid the collection of a tax assessment against a taxpayer. Because the parties identified in such a summons are not entitled to notice, they cannot move to quash the summons in federal court. This Legal Sidebar will discuss how the Court reached its decision and considerations for Congress about third-party IRS summonses.
Legal and Factual Background
The IRS entered formal assessments against Remo Polselli totaling more than $2 million in unpaid taxes and penalties. As part of its efforts to collect the amount due, the IRS initiated an investigation into assets that Mr. Polselli might have been concealing. To that end, an IRS Revenue Officer issued summonses to three banks seeking the financial records of two law firms of which Mr. Polselli had long been a client and Mr. Polselli's wife (the Identified Parties).
The Revenue Officer did not provide notice of the summonses to any of the Identified Parties, but the banks to which the Revenue Officer had issued the summonses did. The Identified Parties then petitioned to quash the summonses in federal district court, which dismissed the case for lack of subject-matter jurisdiction. The court held that the summonses fell within IRC § 7609(c)(2)(D)(i)'s exception to the notice requirement because the IRS issued them to aid in the collection of Mr. Polselli's tax liabilities by locating assets controlled by Mr. Polselli. Because the Identified Parties did not have a right to notice, they also were not authorized to petition to quash the summonses, thus preserving the United States' sovereign immunity and depriving the court of subject-matter jurisdiction.
The Sixth Circuit affirmed on the same grounds in a divided opinion. On appeal, the Identified Parties argued in favor of a rule—previously adopted by the Ninth Circuit—requiring that the taxpayer under examination have some legal interest in the object of the summons for the notice exception to apply. The Sixth Circuit rejected this argument as contrary to the plain language of § 7609(c)(2)(D)(i). Instead, it held that the notice exception applies "as long as the third-party summons is issued to aid in the collection of any assessed tax liability." This aligned with the approach of the Seventh and Tenth Circuits. The Supreme Court subsequently agreed to review the case.
The Supreme Court's Decision
Chief Justice Roberts's opinion first examined the statutory text. It noted that the text of § 7609(c)(2)(D)(i) fails to mention a taxpayer's legal interest in the records sought by the IRS. Because legal interest requirements are applied elsewhere in the IRC, the Court concluded that "[h]ad Congress wanted to include a legal interest requirement, it certainly knew how to do so."
The Identified Parties argued that the statutory phrase in § 7609(c)(2)(D)(i) limiting the notice exception to third-party summonses issued "in aid of the collection" of assessments should be read narrowly. In their view, a summons only aids in collection if it is directed at an account containing assets that the IRS can collect to satisfy the taxpayer's liability. In other words, the Identified Parties argued that the taxpayer must have a legal interest in the summoned account.
The Supreme Court rejected this interpretation as contrary to the meaning of "aid" under § 7609(c)(2)(D)(i), because a summons might help the IRS find collectable assets of the taxpayer even if it does not target such assets directly. For example, the summons could reveal or provide clues to locations where the taxpayer is hiding assets.
The Identified Parties also argued that the notice exception for summonses "in aid of the collection" of assessments in clause (i) of § 7609(c)(2)(D) must be read narrowly to avoid making another notice exception in clause (ii) of that section superfluous. Clause (i) excuses notice for summonses "issued in aid of the collection of . . . an assessment made . . . against the person with respect to whose liability the summons is issued." Clause (ii) exempts from notice summonses "issued in aid of the collection of . . . the liability at law or in equity of any transferee or fiduciary of any person referred to in clause (i)."
The Court rejected this argument because it overlooks two differences between the clauses. First, clause (i) is applicable when the purpose is to aid in the collection of an "assessment," while clause (ii) is applicable when the purpose is to aid in the collection of a "liability." Under the IRC, a liability arises before an assessment, which is when the IRS makes an official recording of a taxpayer's liability for unpaid taxes. Some collection mechanisms are triggered in the IRC before a formal assessment when there is only a liability, while other mechanisms require an official assessment.
Second, clause (i) and clause (ii) are addressed to different entities. Clause (i) is directed at assessments against a taxpayer while clause (ii) concerns the liability of a "transferee or fiduciary" of a taxpayer. As the Court points out, the difference matters if the delinquent taxpayer declares bankruptcy. Because of the bankruptcy stay, the Government may not be able to collect an assessment against the taxpayer (precluding it from the clause (i) exception), but it may nonetheless collect from the liability of the taxpayer's transferee or fiduciary, entitling it to the clause (ii) exception. These two distinctions—between liability and assessment, and between taxpayers and their transferees or fiduciaries—led the Court to conclude that the two clauses serve different purposes. As a result, the Court reasoned that narrowing clause (i) only to a summons issued for records in which the taxpayer has a legal interest is not necessary to give effect to clause (ii).
Justice Jackson, joined by Justice Gorsuch, concurred in the decision, but emphasized the role of notice in protecting the interests of the people identified in the summons. The concurrence thus warned that the notice exceptions in § 7609(c)(2)(D) for summonses issued in aid of collection cannot be "a blank check" for the IRS. On that point, Chief Justice Roberts's opinion did not dismiss apprehension over the scope of the IRS's summons authority, and in oral argument, the Government conceded that the phrase "in aid of . . . collection" is not "limitless." However, because the precise scope of the phrase "in aid of . . . collection" was not at issue in the case, the Court declined to define it. Rather, the Court simply held that the exception in § 7609(c)(2)(D)(i) does not require that a taxpayer have a legal interest in the records summoned by the IRS.
Considerations for Congress
The phrase "in aid of . . . collection" in § 7609(c)(2)(D) is not defined in the IRC. In its opinion, the Court defined "aid" to mean "to help" or "assist," citing a dictionary definition and noting that the Identified Parties used the same definition in their briefing. The Court, though, declined to outline the precise scope of the phrase. The concurrence contended that the reach of the phrase is not unlimited. In oral argument, the Government conceded as much and proposed that a summons is "in aid of . . . collection" if it is "reasonably calculated to assist[] in collection."
With the phrase left undefined in the IRC and the Supreme Court declining to delineate its precise scope, Congress might consider defining the range of IRS activities which are "in aid of . . . collection" as used in § 7609(c)(2)(D).
Congress might also consider expressly providing for situations when a summons is issued for more than one purpose. The notice exceptions in § 7609(c)(2)(D) apply so long as a summons is issued in aid of collection. They do not apply if the IRS seeks to obtain information for purposes other than collection, such as computing a taxpayer's income to determine tax liability. The statute, though, does not explain how notice exceptions apply when a summons is issued for multiple purposes. For example, a summons could be issued to aid collection of tax liability assessed for one tax period and also to calculate tax liability for another. One circuit court has held that the notice exceptions in § 7609(c)(2)(D) apply even where a summons was issued for purposes in addition to aiding in collection.
Finally, Congress might consider requiring the purpose of the summons to be stated. The IRC does not require the IRS to include the purpose of the summons within either the summons itself or the notice of the summons. Many of the notice exceptions in § 7609(c)(2) are applicable when summonses are issued for specified purposes.
Document ID: LSB10998